Edgar Filing: ART TECHNOLOGY GROUP INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 000-26679
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ART TECHNOLOGY GROUP, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 04-3141918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

25 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02141
(Address of principal executive offices) (Zip Code)

(617) 386-1000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value with
Associated Preferred Stock Purchase Rights
(Title of Class)

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any attachment to
this Form 10-K. / /

The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $163,169,000 based on the closing price of the
registrant's common stock on the Nasdaq National Market on March 20, 2002.

The number of shares of the registrant's common stock outstanding as of
March 20, 2002, was 69,730,193.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's proxy statement for its annual meeting of
stockholders to be held on May 22, 2002 are incorporated by reference in
Items 10, 11, 12 and 13 of Part III.

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ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-K

PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 21

PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 21
Item 6. Selected Financial Data..................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 34
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 61

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 61
Item 11. Executive Compensation...................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 61
Item 13. Certain Relationships and Related Transactions.............. 61

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 61

SIGNATURES
Signatures................................................................ 64

ATG, Art Technology Group, Dynamo and the Tech Mark are our registered
trademarks, and ATG Scenario Personalization and ATG Data Anywhere Architecture
are our trademarks. This report also includes trademarks, service marks and
trade names of other companies.

PART I

ITEM 1. BUSINESS

OVERVIEW

We develop and market online customer relationship management, or online
CRM, applications that allow our customers to deliver an integrated,
personalized experience to their customers, partners and employees. We also
offer related integration and support services. Our e-commerce portal and
relationship management applications, which feature personalization technology,
are built on a flexible framework designed to help organizations manage, build
and integrate solutions that will improve their customer interactions and
business processes, increase customer loyalty, reduce expenses and improve
revenues.

OUR SOLUTION

We produce e-business solutions that enable organizations to improve their
relationships with customers, partners and employees. At the heart of our
products is the relationship management framework that provides core
capabilities to all our applications. This framework features personalization
technology, scalable architecture, Java coding and ease of integration. As a
result, our applications have a comprehensive range of out-of-the-box
functionality coupled with the capacity for easy customization.

This framework also allows organizations to integrate our applications into
an organization's existing information technology infrastructure including
systems internally developed and obtained from third parties. The ability to
integrate multiple applications and information systems with our applications
ensures our customers can provide a unified experience to their customers,
employees and partners.

Our solutions provide four key benefits to our customers.

First, ATG Scenario Personalization provides our customers with awareness
and control over the lifecycle of their end-users' experiences. The advantages
of ATG Scenario Personalization include the ability to:

- visually define a user's experience over time;

- maintain the flexibility and adaptability of online CRM applications by
providing the ability to constantly alter the user's experience to address
changing business needs;

- integrate all user "touch points," such as call centers or point of sale
systems; and

- leverage data and processes about the user from across the enterprise,
enabling deeper personalization and better customer experiences.

Second, our products are designed for highly scalable personalized
applications.

- Our software has been written in Java since 1996, is J2EE compliant, and
supports key standards like XML and Web services.

- We focus on personalization, performance and scalability in areas not
covered by the J2EE standards. Our component framework and advanced
caching capabilities provide advantages over applications provided by
vendors that focus on infrastructure.

- ATG Dynamo Application Framework brings all of our personalization
scalability features to our customers operating on standard BEA WebLogic
and IBM WebSphere application servers.

Third, our adaptable, platform-independent framework fits into an existing
information technology architecture and evolves with a changing enterprise.

- Our applications run on ATG Dynamo Application Server, BEA WebLogic and
IBM WebSphere application servers. Companies that utilize our online CRM
applications have the ability to work with multiple application servers
and retain our applications, which provides an advantage over competitors
whose applications run on only one application server. We provide a single
framework for building personalized applications across multiple
application servers, which can provide significant cost savings to
companies that run multiple application servers throughout their
enterprise.

- We provide a flexible framework for custom requirements. The same
framework we use to build commerce, portal, and relationship management
applications is used by our customers to build other applications,
including customer support, e-Learning, and partner relationship
management.

- Our products integrate on multiple platforms such as HP, IBM, Sun, Unix
and Windows NT, and integrates on enterprise applications including SAP
and Siebel. They are compatible with multiple databases including DB2,
Informix, Oracle, and Sybase.

Fourth, ATG Data Anywhere Architecture provides a unified view of content
and data across a business for organizations and their customers. ATG Data
Anywhere Architecture:

- allows our customers to use their existing data schemas, eliminating the
need to modify their existing applications and data schemas to use our
applications;

- provides advanced caching mechanisms, including query and data set
caching, providing the performance needed by highly personalized
applications; and

- provides a single method of accessing disparate data types including HTML,
XML, LDAP repositories and SQL databases. Developers can use a single
mechanism to access data contained in many different formats and systems.

Our professional services division has deployed our applications to over 800
customers and worked with over 200 partners. Our professional service division's
primary goal is to ensure customer success and satisfaction with our online CRM
applications. As part of our commitment to customer success, we have developed
the Adaptive Delivery Framework, a highly flexible delivery methodology that
allows us to deliver applications across all professional services business
lines.

OUR STRATEGY

Our objective is to be a leading developer of online CRM applications that
integrate into our customers' enterprise environment and provide real value by
improving their cost of doing business and creating new and improved methods to
generate revenue. To obtain this objective, we intend to:

- continue to develop innovative online CRM solutions;

- create solution sets that facilitate adoption of our applications in
targeted vertical markets or applications;

- invest in marketing to promote our core capabilities, programs and
alliances;

- continue to build our direct sales capabilities and forge strong alliances
and co-selling relationships with partners; and

- focus our service organization on meeting the changing requirements of our
alliances and customers.

OUR INNOVATIVE SOLUTIONS. From our beginning, we have been innovative in
our approach to product development and customer solutions. We will continue to
invest in technology that enables our applications to tap into an organization's
investment in business process software such as Oracle, SAP,

Siebel and others, and to leverage the information in these disparate systems in
a meaningful and coordinated way for the organization's customers, partners, and
employees. Our solution integrates with a variety of the back-end systems
implemented by Global 2000 organizations and provides users of these
organizations' computer applications with a single view of information in a
personalized way. We intend to further extend our product and technology
leadership by continuing to:

- extend our current capabilities and build new online CRM applications;

- increase the scalability, reliability and performance of our applications;
and

- develop our integration capabilities to allow our products to be even more
easily integrated into an organization's existing infrastructure.

OUR SOLUTION SETS. We are working with our partners to create solutions
that facilitate adoption of our applications into vertical markets that have
specific requirements. These pre-packaged solutions will enable faster
time-to-benefit for targeted vertical markets.

MARKETING. We are continuing to invest in promoting our company,
technology, applications and solution sets through focused initiatives such as
direct marketing, public relations, seminars, trade shows, speaking
opportunities, web marketing, case studies, ATG Innovator magazine and the ATG
Open User Conference.

SALES CAPABILITIES. We sell our products directly to end-users and through
co-selling efforts with systems integrators and technology partners. We intend
to expand our channels to include value added resellers. We currently have more
than 200 systems integrators and technology partners, including Accenture, Cap
Gemini Ernst & Young, Documentum, EDS, E-Tree, Fort Point Partners, Hewlett
Packard, Interwoven, PricewaterhouseCoopers and Sun Microsystems. Our objective
is to maintain close relationships directly with our customers and to motivate
systems integrators to implement our applications in their projects and solution
sets. We plan to leverage our current relationships and develop additional
co-selling relationships with leading systems integrators. In addition, many of
our systems integrators are global enterprises, which we believe provides us
with an opportunity to continue to expand our international business.

SERVICE CAPABILITIES. We have extensive experience in Web application
development and integration services. Through our Professional Services
organization, we provide enabling services to train our systems integrators,
value added resellers, and complementary software vendors in the use of our
products and offer consulting services to assist with customer implementations.
We intend to continue to seek additional opportunities to increase revenues from
product sales by expanding our base of partners trained in the implementation
and application of our products.

PRODUCTS

We produce online CRM applications that enable organizations to improve
their relationships with customers, partners and employees.

ATG RELATIONSHIP MANAGEMENT FRAMEWORK. The ATG Relationship Management
Framework provides a rich set of features for online customer relationship
management applications. With the ATG Relationship Management Framework, firms
can utilize high level business functions built on an underlying stable
technology base to provide self-service to their partners, customers and
employees. The ATG framework is distinguished from similar products by the
advanced ATG Scenario Personalization, ATG Data Anywhere Architecture and its
scalability and flexibility. The products included in the ATG Relationship
Management Framework are the ATG Dynamo Application Server, ATG Dynamo
Personalization Server and the ATG Dynamo Scenario Server.

ATG ENTERPRISE COMMERCE SUITE. The ATG Enterprise Commerce Suite offers a
complete commerce solution for selling to business customers, channel partners,
and consumers. Using the ATG Enterprise Commerce Suite, companies can manage
multiple phases of the end user lifecycle--marketing, sales, and service--while
also leveraging our industry leading personalization functionality to more
effectively manage relationships. The ATG Enterprise Commerce Suite is built on
an adaptable, flexible framework and ATG Data Anywhere Architecture, enabling
companies to lower their total cost of ownership. The products included in the
ATG Enterprise Commerce Suite are the ATG Relationship Management Framework, the
ATG Business Commerce Server and the ATG Comsumer Commerce Server.

ATG ENTERPRISE PORTAL SUITE. The ATG Enterprise Portal Suite offers rich
relationship management and personalization features on a proven platform that
includes tools for developing, deploying, and managing customer, partner, and
employee portals. It features a customizable Portal Application Framework, an
extensive set of application building blocks called "Gears," pre-built sample
applications, and a comprehensive suite of administrative tools. Built on the
latest release of the ATG Relationship Management Framework, the ATG Enterprise
Portal Suite is the only portal offering to support e-Business Scenarios, making
it one of the most powerfully personalized portal solutions available today. The
products included in the ATG Enterprise Portal Suite are the ATG Dynamo
Relationship Management Framework and the ATG Dynamo Portal Server.

Our products run on the ATG Dynamo Application Server, BEA WebLogic and IBM
WebSphere application servers.

In addition, we offer other add-on products that may be combined with these
suites, including the ATG Dynamo Application Integrator (an EAI Solution). The
ATG Dynamo Application Integrator incorporates our product offerings with
enterprise applications from other vendors including SAP and Siebel.

SERVICES

Our Global Services organization provides a variety of consulting, design,
application development, integration, training and support services in
conjunction with our products. These services are provided through our
Professional Services, Education, and Customer Support Service offerings.

PROFESSIONAL SERVICES. The primary goal of our Professional Services
organization is to increase customer satisfaction with our applications. Our
Professional Services includes five primary service offerings:

- STRUCTURED ENABLING SERVICES. Working with a client or designated partner
team, we offer Structured Enabling Services to facilitate project success.
This is our preferred delivery model.

- PACKAGED OFFERINGS. We leverage the e-business expertise we have gained
through hundreds of projects in order to offer a variety of packaged
services to our customers. Packages range from services designed to help
customers gain momentum with their portal or commerce project, to
assessing the benefits of upgrading to the latest version of our
applications and to technical implementation programs.

- CUSTOM SOLUTIONS. We offer customized professional services solutions
tailored to meet the specific needs of our customers across an entire
project. Consulting services can include a combination of system
architecture design, project management, web design, technical training
and business consulting services.

- EXPRESS SERVICES. Our Express Services offerings are short-term
engagements designed to help our customers with a specific component of
their project. Consulting services may consist of system architecture
design, project management, web design, or technical training and support.

- COMPREHENSIVE BUSINESS INNOVATIONS. Our Comprehensive Business Innovations
are full life cycle solution project services with an emphasis on
deploying innovative, mission critical technologies related to our
products.

EDUCATION. We provide a broad selection of educational programs designed to
train customers and partners on our applications. This curriculum addresses the
educational needs of developers, technical managers, business managers, page
designers, and system administrative personnel/deployment engineers. ATG
Education also offers an online learning program that complements our
instructor-led training. Developers can become certified by completing the ATG
Certified Dynamo Developer examination. We also offer end user training to
complete the roll out of a customer's application. We provide a full range of
instructor-led and self-paced training solutions to assist customers with this
key initiative.

CUSTOMER SUPPORT SERVICES. We offer five levels of customer support ranging
from our evaluation support program, which is available for 30 days, to our
Premier Support Program, which includes access to technical support engineers
24 hours a day, seven days per week, for customers deploying mission critical
applications. Customers are entitled to receive software updates, maintenance
releases, online documentation and bug reports, and technical support for an
annual maintenance fee.

CUSTOMERS

We have delivered online CRM solutions to more than 800 companies worldwide.
Our principal target markets are Global 2000 companies. Our customers represent
a broad spectrum of enterprises within diverse industry sectors. The following
is a partial list of customers that have purchased licenses and/or professional
services from us:

CONSUMER RETAIL MANUFACTURING
Best Buy Abbott Laboratories
Neiman Marcus Mars Music
Martha Stewart Living Omnimedia J.Crew
Cabela's Procter & Gamble
Eastman Kodak
Target
Walgreens

FINANCIAL SERVICES TECHNOLOGY
Charles Schwab BellSouth
Barclays Global Investors Handspring
MFS Investment Management Alcatel
John Hancock Funds EMC
KeyBank Sun Microsystems
Zurich Scudder Investments

INTERNATIONAL TRAVEL, MEDIA AND ENTERTAINMENT
Direckt Analge Bank Gameplay GB Ltd.
Kingfisher PLC BMG Direct
Deutsche Poste Sony Online Entertainment Inc.
Six Continents Hotels Meredith Corporation
Hyatt Reader's Digest
Consignia American Airlines
Philips Hilton Hotels Corporation
Lavazza The MTVi Group
beeb.com

TECHNOLOGY

We believe we are a technology leader in providing online CRM solutions due
to our implementation of Java, our strong component model, and our enterprise
integration.

JAVA FOUNDATION. Our products are written in Java and support Java
programming for customization and extension, except for a few integration and
installation modules that must be implemented in other programming languages. We
have performed internal tests to certify that our ATG Dynamo 5 e-Business
Platform supports the J2EE standards established by Sun Microsystems.

We believe that our Java implementation results in the following benefits:

- STRONG COMPONENT MODEL. Java provides a component standard known as
"JavaBeans," which enables developers to segment their code into discrete,
well-defined units which can be assembled in a "building block" fashion to
create new applications. JavaBeans' modularity makes it easier to create
reusable software as well as maintain existing systems.

- PLATFORM NEUTRALITY. Java's portability allows our applications to be run
on virtually any major computer system without modification. This
portability eliminates porting costs normally required to support multiple
platforms or to change platforms, while allowing us to release products on
major platforms simultaneously.

- ENTERPRISE INTEGRATION. We believe that Java's portability and direct
support for distributed applications are helping Java to become the de
facto standard language for enterprise system integration. We expect that
Sun Microsystems' establishment of J2EE standards will make integration
even easier for those enterprise systems that support J2EE specifications.

- FEWER PROGRAMMING ERRORS. Java's automatic memory management reduces
memory corruption errors, which typically represent the most costly and
difficult software "bugs" in conventional compiled languages such as C or
C++.

- ACCELERATED DEVELOPMENT. We believe that the above features, combined with
the broad availability of high-quality Java development tools, result in
faster development time.

MODULAR, STANDARDS-BASED COMPONENT ARCHITECTURE. One of the key features of
our product architecture is its high degree of modularity, achieved by building
additional functionality on top of the JavaBeans component technology.
Customizations and extensions built by our customers or partners using industry
standard JavaBean components can be managed by our ATG Dynamo Application
Framework. The ATG Dynamo Application Framework enhances the naming,
configuration and lifecycle of each component, allowing components to be added,
extended, duplicated or replaced without recompilation of the rest of the
system. The modularity of our component technology allows our products to be
adapted to meet future business needs. In contrast, producers of non-modular
products must try to anticipate and develop additional functionality at the time
that they market their products.

One of the most powerful uses of our component technology is to integrate
our software with external enterprise systems. We provide reference
implementations of integration components while enabling our customers and
partners to easily replace our reference components with new components that
provide the same function but integrate with their existing systems. We adhere
to industry standards to enable our products to leverage technologies produced
by third parties and to protect the development investments of our partners and
customers.

RESEARCH AND DEVELOPMENT

Our research and development group is responsible for core technology,
product architecture, product development, quality assurance, documentation and
third-party software integration. This group

also assists with pre-sale, customer support activities and quality assurance
tasks supporting the Enabling Services group.

Since we began focusing on selling software products in 1996, the majority
of our research and development activities have been directed towards creating
new versions of our products, which extend and enhance competitive product
features. We continue to focus our efforts on developing new and innovative
products, as well as integrating our products with external enterprise systems
and third party application servers. Our research and development expenses were
$6.3 million in 1999, $19.0 million in 2000 and $30.1 million in 2001. The
systems we integrate with include relational databases, content management
systems and credit card payment servers.

SALES AND MARKETING

Our principal target markets are Global 2000 companies and leading companies
using the Internet as a primary business channel. We target these potential
customers through our direct sales force and through channel partners, including
systems integrators and other technology partners. We currently have more than
200 systems integrators and technology partners.

We employ one group of sales professionals who are compensated based on
product and services sales made directly to end-users and through Value Added
Resellers, and another group of sales professionals who are dedicated to
recruiting, training and supporting the Value Added Resellers. We train and
assist systems integrators in promoting, selling, deploying, extending and
supporting our products. The objective of this strategy is to establish close
product relationships directly with our customers and to motivate systems
integrators to adopt the ATG Dynamo technology and suite of products for online
and Web-based projects for their clients.

In addition, we have initiated a strategy to co-market our products with
technology partners and to sell our products through original equipment
manufacturers. We intend to increase sales of our products by entering into
similar relationships with additional technology partners and original equipment
manufacturers.

Our co-marketing relationships are with major systems integrators that serve
the market for information system products and services. The objective of this
co-marketing strategy is to motivate systems integrators to adopt the ATG Dynamo
technology and suite of products on Web-based projects or their clients. We
train and assist our systems integration partners to enable them to deploy,
extend and support our products.

Set forth below is a partial list of organizations with which we have
selling and marketing relationships:

NORTH AMERICA
Accenture Fort Point Partners
Blast Radius Hewlett Packard
Cap Gemini Ernst & Young Interwoven
ClearCommerce McFayden Consulting
Context Integration PricewaterhouseCoopers
Documentum Sun Microsystems
EDS Thoughtmill
TIBCO Systems

INTERNATIONAL
E-Tree Materna
Quidnunc

As of December 31, 2001, in addition to offices throughout the United
States, we had sales personnel located in Australia, Canada, England, France,
Germany, Italy, the Netherlands, Japan, Korea and Sweden. Our revenues from
sources outside the United States were $2.2 million, or 7% of total revenue, in
1999, $37.6 million, or 23% of total revenue, in 2000, and $47.6 million, or 34%
of total revenue, in 2001. During the past year, we have established
relationships with new international partners and have added key international
accounts. We intend to continue our international expansion by working with
additional global and local partners and by creating additional local
infrastructure to provide direct sales, service and marketing.

COMPETITION

The market for online customer relationship management solutions is
intensely competitive, subject to rapid technological change, and significantly
affected by new product introductions and other market activities. We expect
competition to persist and intensify in the future. We have four primary sources
of competition:

- portal software vendors such as Epicentric, SAP Portals, a subsidiary of
SAP, and Plumtree;

- Internet applications software vendors, such as BroadVision, who compete
on various levels including portals, relationship management, and
e-commerce;

- application server vendors, such as BEA Systems, IBM's WebSphere products,
and Microsoft; and

- in-house development efforts by potential customers or partners.

We believe the primary factors upon which we compete are the ability to
prove return on investment, functionality, scalability, and extensibility of our
products, the extent to which our products integrate with other systems, and our
ability to provide quality services to assist our customers and partners.

We believe that we have competitive advantages that differentiate our
products and services from those of our competitors. Our out-of-the-box
functionality and consistent architecture provide improved time-to-market, lower
cost of ownership, and scalability. Our product line, built on Java standards-
based technology, provides investment protection. Product functionality and
advanced personalization technology drive business value for our customers such
as the ability to drive revenue, improve customer loyalty, leverage
mutli-channel selling, and create a single view of their constituents.

Despite these advantages, some of our competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do. As a result, they may be able to undertake more extensive
promotional activities, offer more attractive pricing and purchase terms, and
bundle their products in a manner that would put us at a competitive
disadvantage.

Competition could materially and adversely affect our ability to obtain
revenues from license fees from new or existing customers and professional
services revenues from existing customers. Further, competitive pressures could
require us to reduce the price of our software products. In either case, our
business, operating results and financial condition would be materially and
adversely affected.

PROPRIETARY RIGHTS AND LICENSING

Our success and ability to compete depend on our ability to develop and
protect the proprietary aspects of our technology and to operate without
infringing on the proprietary rights of others. We rely on a combination of
trademark, trade secret and copyright law and contractual restrictions to
protect our proprietary technology. These legal protections afford only limited
protection for our technology. We seek to protect our source code for our
software, documentation and other written materials under trade secret and
copyright laws. We license our software pursuant to signed license, "click
through" or

"shrink wrap" agreements, which impose restrictions on the licensee's ability to
use the software, such as prohibiting reverse engineering and limiting the use
of copies. We also seek to avoid disclosure of our intellectual property by
requiring employees and consultants with access to our proprietary information
to execute confidentiality agreements and by restricting access to our source
code. Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments and
enhancements to existing products are more important than legal protections to
establish and maintain a technology leadership position.

Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a persistent problem.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect proprietary
rights to as great an extent as the laws of the United States. Any such
resulting litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our business, operating
results and financial condition. There can be no assurance that our means of
protecting our proprietary rights will be adequate or that our competitors will
not independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.

In addition, our software is written in the Java programming language
developed by Sun Microsystems and we incorporate J2EE, Java Runtime Environment,
Java Naming and Directory Interface, Java Servlet Development Kit, Java
Foundation Classes, JavaMail and JavaBeans Activation Framework into our
products under licenses granted to us by Sun. Our ATG Dynamo 5 e-Business
Platform has been designed to support Sun's J2EE standards. If Sun were to
decline to continue to allow us to use these technologies for any reason, we
would be required to (a) license the equivalent technology from another source,
(b) rewrite the technology ourselves, or (c) rewrite portions of our software to
accommodate the change or no longer use the technology.

EMPLOYEES

As of December 31, 2001, we had a total of 634 employees. Of our employees,
146 were in research and development, 190 in sales and marketing, 201 in
professional services and 97 in finance and administration. Our future success
will depend in part on our ability to attract, retain and motivate highly
qualified technical and management personnel, for whom competition is intense.
From time to time, we also employ independent contractors to support our
professional services, product development, sales, marketing and business
development organizations. Our employees are not represented by any collective
bargaining unit, and we have never experienced a work stoppage. We believe our
relations with our employees are good.

RISK FACTORS THAT MAY AFFECT RESULTS

This annual report contains forward-looking statements, including statements
about our growth and future operating results. For this purpose, any statement
that is not a statement of historical fact should be considered a
forward-looking statement. We often use the words "believes," "anticipates,"
"plans," "expects," "intends" and similar expressions to help identify
forward-looking statements.

There are a number of important factors that could cause our actual results
to differ materially from those indicated or implied by forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this annual
report.

RISKS RELATED TO OUR BUSINESS

WE MAY NOT BE ABLE TO SUSTAIN OR INCREASE OUR REVENUE OR PROFITABILITY ON A
QUARTERLY OR ANNUAL BASIS.

We incurred a loss in each quarter of fiscal 2001. As of December 31, 2001,
we had an accumulated deficit of $170.4 million. Although our revenues have
grown significantly in the past, they have grown from a relatively small base
and, as a result, we do not believe that we will be able to sustain these growth
rates. In addition, we believe the current United States economic downturn will
continue to have an adverse effect on demand for our products and services, and
therefore adversely affect our revenues as well. Because we have a limited
operating history, and operate in a rapidly evolving industry, we have
difficulty predicting our future operating results and we cannot be certain that
our revenues will grow at a rate that will allow us to achieve profitability on
a quarterly or annual basis.

WE EXPECT OUR REVENUES AND OPERATING RESULTS TO FLUCTUATE, AND THE PRICE OF OUR
COMMON STOCK COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF
SECURITIES ANALYSTS.

Our revenues and operating results are likely to vary significantly from
quarter to quarter. If our quarterly results fall below the expectations of
securities analysts, the price of our common stock could fall. A number of
factors are likely to cause variations in our operating results, including:

- fluctuating economic conditions, particularly as they affect our
customers' willingness to expand information technology spending;

- the timing of sales of our products and services;

- the timing of customer orders and product implementations;

- delays in introducing new products and services;

- increased expenses, whether related to sales and marketing, product
development or administration;

- the mix of revenues derived from products and services;

- timing of hiring and utilization of services personnel;

- cost overruns related to fixed-price services projects;

- the mix of domestic and international sales; and

- costs related to possible acquisitions of technologies or businesses.

Accordingly, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. The results of one or a series of
quarters should not be relied upon as an indication of our future performance.

OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS.

Our long sales cycle, which can range from several weeks to several months
or more, makes it difficult to predict the quarter in which sales may occur. We
have a long sales cycle because we generally need to educate potential customers
regarding the use and benefits of our products and services. Our sales cycle
varies depending on the size and type of customer contemplating a purchase and
whether we have conducted business with a potential customer in the past. In
addition, we believe the current economic downturn in the United States has
increased the average length of our sales cycle as customers have deferred
implementing new e-commerce solutions. We may incur significant sales and
marketing expenses in anticipation of licensing our products, and if we do not
achieve the level of revenues we expected, our operating results will suffer and
our stock price may decline. These potential customers frequently need to obtain
approvals from multiple decision makers prior to making purchase decisions.
Delays in sales could cause significant variability in our revenues and
operating results for any particular period.

THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS INTENSELY
COMPETITIVE, AND WE EXPECT COMPETITION TO INTENSIFY IN THE FUTURE.

The market for Internet customer relationship management solutions is
intensely competitive and we expect competition to intensify in the future. This
level of competition could reduce our revenues and result in increased losses or
reduced profits. Our primary competition currently comes from in-house
development efforts by potential customers or partners, as well as from other
vendors of Web-based application software. We currently compete with Internet
application software vendors such as Blue Martini, BroadVision and Vignette. We
also compete with platform application server products and vendors such as BEA
Systems, IBM's Websphere products, Microsoft, and the Netscape/Sun Microsystems
Alliance, among others. In addition, we compete with portal software vendors
such as Epicentric, SAP Portals, a subsidiary of SAP, and Plumtree. Many of our
competitors have longer operating histories and significantly greater financial,
technical, marketing and other resources than we do, and may be able to respond
more quickly to new or changing opportunities, technologies and customer
requirements. Also, many current and potential competitors have greater name
recognition and more extensive customer bases that they can use to gain market
share. These competitors may be able to undertake more extensive promotional
activities, adopt more aggressive pricing policies and offer more attractive
terms to purchasers than we can. Moreover, our current and potential
competitors, such as Microsoft and the Netscape/Sun Microsystems Alliance, may
bundle their products in a manner that may discourage users from purchasing our
products. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products and expand their markets. Accordingly, new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.

WE DEPEND ON OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS.

Since our potential customers often rely on third-party systems integrators
to develop, deploy and manage Web sites for conducting commerce on the Internet,
we cultivate relationships with systems integrators in order to encourage them
to support our products. If we do not adequately train a sufficient number of
systems integrators or if systems integrators were to devote their efforts to
integrating or co-selling different products, our revenues could be reduced and
our operating results could be harmed.

COMPETITION WITH OUR RESELLER PARTNERS COULD LIMIT OUR SALES OPPORTUNITIES AND
JEOPARDIZE THESE RELATIONSHIPS.

We sell products through resellers and original equipment manufacturers. In
some instances, we target our direct selling efforts toward markets that are
also served by some of these partners. This

competition may limit our ability to sell our products and services directly in
these markets and may jeopardize, or result in the termination of, these
relationships.

OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO ATTRACT AND RETAIN OTHER KEY
PERSONNEL.

Our success depends largely on the skills, experience and performance of key
members of our management and other key personnel. If we lose one or more of our
key employees, our business could be harmed. In addition, our future success
will depend in large part on our ability to continue attracting and retaining
highly skilled personnel. Like other software companies, we face intense
competition for qualified personnel. We may not be successful in attracting,
assimilating and retaining qualified personnel in the future.

WE COULD INCUR SUBSTANTIAL COSTS PROTECTING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR DEFENDING AGAINST A CLAIM OF INFRINGEMENT.

Our professional services often involve the development of custom software
applications for specific customers. In some cases, customers retain ownership
or impose restrictions on our ability to use the technologies developed from
these projects. Issues relating to the ownership of software can be complicated,
and disputes could arise that affect our ability to resell or reuse applications
we develop for customers.

We seek to protect the source code for our proprietary software both as a
trade secret and as a copyrighted work. However, because we make the source code
available to some customers, third parties may be more likely to misappropriate
it. Our policy is to enter into confidentiality agreements with our employees,
consultants, vendors and customers and to control access to our software,
documentation and other proprietary information. Despite these precautions, it
may be possible for someone to copy our software or other proprietary
information without authorization or to develop similar software independently.

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We could incur
substantial costs to prosecute or defend any intellectual property litigation.
If we sue to enforce our rights, the litigation would be expensive, would divert
management resources and may not prevent other parties from using our
intellectual property without our permission. In February 2000, we settled a
lawsuit filed by BroadVision, which alleged that we were infringing on a patent
for a method of conducting e-commerce. As part of the settlement, we agreed to
pay BroadVision a total of $15.0 million in license fees over a three-year
period, of which $13.0 million had been paid as of December 31, 2001.

In addition, we have agreed to indemnify customers against claims that our
products infringe the intellectual property rights of third parties. The results
of any intellectual property litigation to which we might become a party may
force us to do one or more of the following:

- cease selling or using products or services that incorporate the
challenged intellectual property;

- obtain a license, which may not be available on reasonable terms, to sell
or use the relevant technology; or

- redesign those products or services to avoid infringement.

IF WE FAIL TO ADAPT TO RAPID CHANGES IN THE MARKET FOR INTERNET CUSTOMER
RELATIONSHIP MANAGEMENT SOFTWARE, OUR EXISTING PRODUCTS COULD BECOME OBSOLETE.

The market for our products is marked by rapid technological change,
frequent new product introductions and Internet-related technology enhancements,
uncertain product life cycles, changes in customer demands and evolving industry
standards. We may not be able to develop and market new

products or product enhancements that comply with present or emerging Internet
technology standards. New products based on new technologies or new industry
standards could render our existing products obsolete and unmarketable. To
succeed, we will need to enhance our current products and develop new products
on a timely basis to keep pace with developments related to Internet technology
and to satisfy the increasingly sophisticated requirements of customers.
E-commerce technology is complex and new products and product enhancements can
require long development and testing periods. Any delays in developing and
releasing new or enhanced products could cause us to lose revenue opportunities
and customers.

OUR BUSINESS MAY SUFFER IF WE FAIL TO ADDRESS THE CHALLENGES ASSOCIATED WITH
INTERNATIONAL OPERATIONS.

We currently maintain offices in Australia, Canada, England, France,
Germany, Korea, Japan, the Netherlands, and Sweden. We derived 34% of our total
revenues from customers outside the United States for the year ending
December 31, 2001. We anticipate that revenues from customers outside the United
States could account for an increased portion of our total revenues for the
foreseeable future. To date, however, we have limited experience in
international operations and may not be able to compete successfully in
international markets. Our operations outside North America are subject to
additional risks, including:

- changes in regulatory requirements, exchange rates, tariffs and other
barriers;

- longer payment cycles and problems in collecting accounts receivable;

- political and economic instability;

- difficulties in managing systems integrators and technology partners;

- difficulties in staffing and managing foreign subsidiary operations;

- differing technology standards;

- difficulties and delays in translating products and product documentation
into foreign languages;

- reduced protection for intellectual property rights in some of the
countries in which we operate or plan to operate; and

- potentially adverse tax consequences.

The impact of future exchange rate fluctuations on our operating results
cannot be accurately predicted. We may increase the extent to which we
denominate arrangements with international customers in the currencies of the
countries in which the software or services are provided. From time to time we
may engage in hedges of a significant portion of contracts denominated in
foreign currencies. Any hedging policies implemented by us may not be
successful, and the cost of these hedging techniques may have a significant
negative impact on our operating results.

WE USE THE JAVA PROGRAMMING LANGUAGE TO DEVELOP OUR PRODUCTS, AND OUR BUSINESS
COULD BE HARMED IF JAVA LOSES MARKET ACCEPTANCE OR IF WE ARE NOT ABLE TO
CONTINUE USING JAVA OR JAVA-RELATED TECHNOLOGIES.

We write our software in the Java computer programming language developed by
Sun Microsystems. While a number of companies have introduced Web applications
based on Java, Java could fall out of favor, and support by Sun Microsystems or
other companies could decline. Moreover, our new ATG Dynamo 5.5 e-Business
Platform is designed to support Sun's Java 2 Platform, Enterprise Edition, or
J2EE, standards for developing modular Java programs that can be accessed over a
network. We have licensed the J2EE brand and certification tests from Sun. There
can be no assurance that these standards will be widely adopted, that we can
continue to support J2EE standards established by Sun from time to time or that
the J2EE brand will continue to be made available to us on commercially
reasonable terms. If Java or J2EE support decreased or we could not continue to
use

Java or related Java technologies or to support J2EE, we might have to rewrite
the source code for our entire product line to enable our products to run on
other computer platforms. Also, changes to Java or J2EE standards or the loss of
our license to the J2EE brand could require us to change our products and
adversely affect the perception of our products by our customers. If we were
unable to develop or implement appropriate modifications to our products on a
timely basis, we could lose revenue opportunities and our business could be
harmed.

OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE, OR PRODUCT LIABILITY CLAIMS WITH
SUBSTANTIAL LITIGATION COSTS.

Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. We began shipping latest version of ATG Dynamo e-business Platform,
version 5.5, in the third quarter of 2001. Despite internal testing and testing
by customers, our current and future products may contain serious defects.
Serious defects or errors could result in lost revenues or a delay in market
acceptance.

Since our customers use our products for critical business applications such
as e-commerce, errors, defects or other performance problems could result in
damage to our customers. They could seek significant compensation from us for
the losses they suffer. Although our license agreements typically contain
provisions designed to limit our exposure to product liability claims, existing
or future laws or unfavorable judicial decisions could negate these limitations.
Even if not successful, a product liability claim brought against us would
likely be time-consuming and costly.

IF WE ACQUIRE OTHER COMPANIES OR BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT
COULD HURT OUR BUSINESS.

We acquired Petronio Technology Group in May 2000 for approximately
$1.2 million and Toronto Technology Group Inc. in July 2000 for approximately
$12.0 million. These acquisitions did not produce the revenues and synergies we
expected. We have incurred approximately $5.3 million in restructuring charges
during the year ended December 31, 2001 related to the write off of unamortized
goodwill and the settlement of restricted stock in connection with these
acquisitions. In addition, we have also incurred additional restructuring
charges during the year ended December 31, 2001 in reducing headcount related to
the Toronto Technology Group Inc. acquisition.

In the future, we may pursue additional acquisitions to obtain complementary
businesses, products, services or technologies. An acquisition may not produce
the revenues, earnings or business synergies that we anticipated, and an
acquired business, product, service or technology might not perform as we
expected. If we pursue an acquisition, our management could spend a significant
amount of time and effort in identifying and completing the acquisition. If we
complete an acquisition, we may encounter significant difficulties and incur
substantial expenses in integrating the operations and personnel of the acquired
company into our operations while preserving the goodwill of the acquired
company. In particular, we may lose the services of key employees of the
acquired company and we may make changes in management that impair the acquired
company's relationships with employees and customers.

Any of these outcomes could prevent us from realizing the anticipated
benefits of our acquisitions. To pay for an acquisition, we might use stock or
cash. Alternatively, we might borrow money from a bank or other lender. If we
use our stock, our stockholders would experience dilution of their ownership
interests. If we use cash or debt financing, our financial liquidity would be
reduced. We may be required to capitalize a significant amount of intangibles,
including goodwill, which may lead to significant amortization charges. In
addition, we may incur significant, one-time write-offs and amortization
charges. These amortization charges and write-offs could decrease our future
earnings or increase our future losses.

RISKS RELATED TO THE INTERNET INDUSTRY

OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF E-COMMERCE.

Our success will depend heavily on the continued use of the Internet for
e-commerce. The current United States economic downturn has reduced demand for
our products as customers and potential customers delay or cancel the
implementation of customer relationship management solutions. If the market for
our products and services does not continue to mature, we will be unable to
execute successfully our business plan. Adoption of electronic commerce and
customer relationship management, particularly by those companies that have
historically relied upon traditional means of commerce, will require a broad
acceptance of different methods of conducting business. Our future revenues and
profits will substantially depend on the Internet being accepted and widely used
for commerce and communication. If Internet commerce does not continue to grow
or grows more slowly than expected, our future revenues and profits may not meet
our expectations or those of analysts. Similarly, purchasers with established
patterns of commerce may be reluctant to alter those patterns or may otherwise
resist providing the personal data necessary to support our consumer profiling
capability.

REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS OR
INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF E-COMMERCE.

As e-commerce evolves, federal, state and foreign agencies could adopt
regulations covering issues such as user privacy, content and taxation of
products and services. If enacted, government regulations could limit the market
for our products and services or could impose burdensome requirements that
render our business unprofitable. Although many regulations might not apply to
our business directly, we expect that laws regulating the solicitation,
collection or processing of personal and consumer information could indirectly
affect our business. The Telecommunications Act of 1996 prohibits certain types
of information and content from being transmitted over the Internet. The
prohibition's scope and the liability associated with a violation are currently
unsettled. In addition, although substantial portions of the Communications
Decency Act were held to be unconstitutional, we cannot be certain that similar
legislation will not be enacted and upheld in the future. It is possible that
legislation could expose companies involved in e-commerce to liability, which
could limit the growth of e-commerce generally. Legislation like the
Telecommunications Act and the Communications Decency Act could dampen the
growth in Web usage and decrease its acceptance as a medium of communications
and commerce.

THE INTERNET IS GENERATING PRIVACY CONCERNS THAT COULD RESULT IN LEGISLATION OR
MARKET PERCEPTIONS THAT COULD HARM OUR BUSINESS OR RESULT IN REDUCED SALES OF
OUR PRODUCTS, OR BOTH.

Businesses use our ATG Dynamo Personalization Server product to develop and
maintain profiles to tailor the content to be provided to Web site visitors.
When a visitor first arrives at a Web site, our software creates a profile for
that visitor. If the visitor registers or logs in, the visitor's identity is
added to the profile, preserving any profile information that was gathered up to
that point. ATG Dynamo Personalization Server tracks both explicit user profile
data supplied by the user as well as implicit profile attributes derived from
the user's behavior on the Web site. Privacy concerns may cause visitors to
resist providing the personal data or avoid Web sites tracking the Web
behavioral information necessary to support this profiling capability. More
importantly, even the perception of security and privacy concerns, whether or
not valid, may indirectly inhibit market acceptance of our products. In
addition, legislative or regulatory requirements may heighten these concerns if
businesses must notify Web site users that the data captured after visiting Web
sites may be used to direct product promotion and advertising to that user.
Other countries and political entities, such as the European Economic Community,
have adopted such legislation or regulatory requirements. The United States may
adopt similar legislation or regulatory requirements. If privacy legislation is
enacted or consumer privacy concerns are not adequately addressed, our business,
financial condition and operating results could be harmed.

Our products use "cookies" to track demographic information and user
preferences. A "cookie" is information keyed to a specific user that is stored
on a computer's hard drive, typically without the user's knowledge. Cookies are
generally removable by the user, although removal could affect the content
available on a particular site. Germany has imposed laws limiting the use of
cookies, and a number of Internet commentators and governmental bodies in the
United States and other countries have urged passage of laws limiting or
abolishing the use of cookies. If such laws are passed or if users begin to
delete or refuse cookies as a common practice, demand for our personalization
products could be reduced.

RISKS RELATED TO THE SECURITIES MARKETS

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.

The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile. For example, the market price of our
common stock has ranged from $.58 per share to $126.88 per share since our
initial public offering in July 1999. Fluctuations in market price and volume
are particularly common among securities of Internet and software companies. The
market price of our common stock may fluctuate significantly in response to the
following factors, some of which are beyond our control:

- variations in our quarterly operating results;

- changes in market valuations of Internet and software companies;

- our announcements of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;

- our failure to complete significant sales;

- additions or departures of our key personnel;

- future sales of our common stock; or

- changes in financial estimates by securities analysts.

WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION.

We currently are the subject of securities class action litigation. If a
court awards damages to the plaintiffs, the total amount could exceed the limit
of our existing insurance. This litigation also may divert management's
attention and resources. We may be the target of similar litigation in the
future if the market for our stock becomes volatile. For a further description
of the pending litigation, see "Item 3. Legal Proceedings."

OUR EXECUTIVE OFFICERS AND DIRECTORS WILL BE ABLE TO INFLUENCE MATTERS REQUIRING
STOCKHOLDER APPROVAL AND COULD DELAY OR PREVENT SOMEONE FROM ACQUIRING OR
MERGING WITH US ON TERMS FAVORED BY A MAJORITY OF OUR INDEPENDENT STOCKHOLDERS.

Our executive officers and directors beneficially owned approximately 18.4%
of our common stock as of December 31, 2001. As a result, these stockholders may
be able to influence matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This
could delay or prevent someone from acquiring or merging with us.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY.

Certain provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable, which could reduce the market price of our common stock.
These provisions include:

- authorizing the issuance of "blank check" preferred stock;

- providing for a classified board of directors with staggered, three-year
terms;

- providing that directors may only be removed for cause by a two-thirds
vote of stockholders;

- limiting the persons who may call special meetings of stockholders
prohibiting stockholder action by written consent;

- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings; and

- authorizing anti-takeover provisions.

In addition, we adopted a shareholder rights plan in 2001 and Delaware law
may further discourage, delay or prevent someone from acquiring or merging with
us.

ITEM 2. PROPERTIES

Our principal administrative, research and development, sales, consulting,
training and support facilities occupy approximately 91,000 square feet in
Cambridge, Massachusetts, pursuant to leases expiring through 2007. Our west
coast headquarters occupy 40,000 square feet in San Francisco, California
pursuant to a lease expiring in 2011.

In the first quarter of 2001, we entered into a lease for 117,900 square
feet of expansion space in Cambridge, Massachusetts. However, due to weakening
market conditions we terminated this lease on January 2, 2002.

Our European headquarters are located in Apex Plaza, Reading UK where we
lease approximately 15,600 square feet. Our Asia Pacific headquarters are
located in North Sydney, Australia where we currently lease 8,600 square feet.
Early in 2001, we entered into a lease for a new facility under construction
that will provide 38,500 square feet in Frankfurt, Germany. This facility is
expected to be available for occupancy in April 2002.

In addition, we have offices in Australia, Canada, France, Japan, Korea, the
Netherlands and Sweden.

ITEM 3. LEGAL PROCEEDINGS

A patent infringement claim was filed by BroadVision, one of our
competitors, against us on December 11, 1998. The case was filed in the U.S.
District Court for the Northern District of California. BroadVision alleged that
we are infringing on a patent for a method of conducting e-commerce. We settled
the lawsuit in February 2000. As part of the settlement, we, in return for cash
payments, received a non-exclusive, worldwide, perpetual, paid-up license to
make, use and sell products arguably covered by the patent and any other patents
that may be issued in the future that are related to the original patent. We
agreed to pay BroadVision a total of $15.0 million in license fees over a
three-year period. As of December 31, 2001, we owed $2.0 million to BroadVision,
which is payable in 2002.

On October 31, 2000, Aron Rosenberg, one of our stockholders, brought a
claim on our behalf in the U.S. District Court for the District of Delaware.
Mr. Rosenberg alleges that the Tudor and Raptor entities violated Section 16(b)
of the Securities Exchange Act of 1934 in connection with their sale of our
common stock after our initial public offering on July 20, 1999. Those entities
acquired our common stock in connection with our Series D preferred stock that
they acquired more than six months before the initial public offering.
Mr. Rosenberg claims that those entities should be deemed to have purchased our
common stock when our stockholders approved an amendment to our certificate of
incorporation related to our preferred stock on June 18, 1999. He also claims
that those entities obtained profits of more than $70 million in connection with
sales of our common stock within six months after June 18, 1999, and that those
profits should be paid to us. In January 2002, the parties entered into a
settlement agreement subject to the final approval of the court. The court has
entered an order approving the form of settlement. If the settlement is
approved, Tudor will pay $1,450,000 to us, from which we will be required to pay
to plaintiff's attorneys an amount not to exceed $400,000. In return, we will
release Tudor from any claims under Section 16 of the Securities Exchange Act
arising from the facts and circumstances alleged in the complaint.

actions were consolidated and transferred to the District of Massachusetts on or
about November 27, 2001. On December 13, 2001, the Court issued an Order of
Consolidation in which it consolidated all actions filed against us and
appointed certain individuals as lead plaintiffs in the consolidated action. It
also appointed two law firms as co-lead counsel, and a third law firm as liaison
counsel. Counsel for the plaintiffs filed a consolidated amended complaint on
March 1, 2002. Our response is due April 15, 2002.

While management believes the claims against the Company are without merit,
and intends to defend the action vigorously, the litigation is in the
preliminary stage.

The Company is also subject to various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on our business, financial condition or
results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock trades on the Nasdaq National Market under the symbol
"ARTG." The following table sets forth the high and low reported sales prices of
our common stock for the periods indicated as reported by the Nasdaq National
Market.

HIGH LOW
-------- --------

Year ending December 31, 2000
First quarter............................................ $106.50 $43.81
Second quarter........................................... 101.94 28.63
Third quarter............................................ 126.88 76.00
Fourth quarter........................................... 96.50 20.50

Year ending December 31, 2001
First quarter............................................ $ 43.94 $15.86
Second quarter........................................... 12.16 4.05
Third quarter............................................ 5.22 .65
Fourth quarter........................................... 4.72 .58

On March 20, 2002 the last reported sale price on the Nasdaq National Market
for our common stock was $2.34 per share. On March 20, 2002, there were
approximately 22,000 holders of record of our common stock.

We currently intend to retain future earnings, if any, to finance our
growth. We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs, restrictions in financing agreements and plans for expansion.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below as of December 31,
2000 and 2001 and for each of the years ended December 31, 1999, 2000 and 2001
are derived from consolidated financial statements audited by Arthur Andersen
LLP, independent public accountants, which are included in this annual report.
The data as of December 31, 1997, 1998 and 1999 and for each of the years ended

December 31, 1997 and 1998 are derived from consolidated financial statements
audited by Arthur Andersen LLP and not included in this report. Additional
information regarding basic and diluted net income (loss) per share is described
in note 1(e) to the consolidated financial statements included elsewhere in this
report. The following data should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this report and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenues:
Product license........................... $ 1,866 $ 4,059 $ 18,590 $121,525 $ 76,631
Services.................................. 4,592 8,078 13,487 41,817 62,238
------- ------- -------- -------- ---------
Total revenues.......................... 6,458 12,137 32,077 163,342 138,869
------- ------- -------- -------- ---------
Cost of Revenues:
Product license........................... 64 30 8,160 3,426 4,616
Services.................................. 3,133 5,020 10,232 34,739 45,892
------- ------- -------- -------- ---------
Total cost of revenues.................. 3,197 5,050 18,392 38,165 50,508
------- ------- -------- -------- ---------
Gross profit............................ 3,261 7,087 13,685 125,177 88,361
------- ------- -------- -------- ---------
Operating Expenses:
Research and development.................. 3,661 3,355 6,343 18,966 30,119
Sales and marketing....................... 2,287 4,074 15,921 73,261 93,186
General and administrative................ 1,418 2,291 5,323 22,791 23,952
Amortization of deferred compensation..... -- 107 1,127 1,273 1,280
Restructuring............................. -- -- -- -- 76,945
------- ------- -------- -------- ---------
Total operating expenses................ 7,366 9,827 28,714 116,291 225,482
------- ------- -------- -------- ---------
Income (loss) from operations............... (4,105) (2,740) (15,029) 8,886 (137,121)
Interest and other income, net............ (123) (111) 1,897 8,979 4,967
------- ------- -------- -------- ---------
Net income (loss) before provision for
income taxes.......................... (4,228) (2,851) (13,132) 17,865 (132,154)
Provision for income taxes.................. -- -- -- 3,378 23,851
------- ------- -------- -------- ---------
Net income (loss)....................... (4,228) (2,851) (13,132) 14,487 (156,005)
Accretion of Dividends,
Discount and Offering Costs on Preferred
Stock................................... (214) (1,594) (4,395) -- --
------- ------- -------- -------- ---------
Net income (loss) available for common
stockholders.......................... $(4,442) $(4,445) $(17,527) $ 14,487 $(156,005)
======= ======= ======== ======== =========
Net income (loss) per share:
Basic..................................... $ (0.25) $ (0.25) $ (0.45) $ 0.22 $ (2.27)
======= ======= ======== ======== =========
Diluted................................... $ (0.25) $ (0.25) $ (0.45) $ 0.20 $ (2.27)
======= ======= ======== ======== =========
Weighted average common shares outstanding:
Basic..................................... 17,744 17,394 38,777 66,932 68,603
======= ======= ======== ======== =========
Diluted................................... 17,744 17,394 38,777 73,138 68,603
======= ======= ======== ======== =========

CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):

1997 1998 1999 2000 2001
-------- -------- -------- -------- ---------

Cash, cash equivalents and short term
marketable securities..................... $ 187 $ 4,093 $129,848 $126,473 $ 80,306
Working capital (deficit)................... (1,328) 3,649 117,727 122,422 54,749
Long-term marketable securities............. -- -- 19,394 17,734 --
Total assets................................ 1,672 7,766 177,735 259,515 137,488
Long-term obligations, less current
maturities................................ 122 322 4,000 2,000 --
Redeemable convertible preferred stock...... 3,153 8,313 -- -- --
Total stockholders' equity (deficit)........ (4,060) (4,034) 146,385 191,973 42,909

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our consolidated financial
statements and the related notes appearing elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under "Item 1. Business--Risk Factors that
May Affect Results" and elsewhere in this report.

We were founded in December 1991. From 1991 through 1995, we devoted our
efforts principally to building, marketing and selling our professional services
capabilities and to research and development activities related to our software
products. Beginning in 1996, we began to focus on selling our software products.
To date, we have enhanced and released several versions of our ATG Dynamo
products. We market and sell our products worldwide through our direct sales
force, systems integrators, technology partners and original equipment
manufacturers.

We derive our revenues from the sale of software product licenses and
related services. Product license revenues are derived from the sale of software
licenses of our ATG Dynamo products. Our software licenses are priced based on
either the size of the customer implementation or site license terms. Services
revenues are derived from fees for professional services, training and software
maintenance and support. Professional services include custom application
development and project and technical consulting. We bill professional service
fees primarily on a time and materials basis or in some cases, on a fixed-price
schedule defined specifically in our contracts. Software maintenance and support
arrangements are priced based on the level of services provided. Generally,
customers are entitled to receive software updates, maintenance releases and
technical support for an annual maintenance fee of 18% to 23% of the list price
of the licensed product. Customers that purchase maintenance and support
generally receive all product updates and upgrades of software modules purchased
as well as on-line and telephone technical support. Training is billed as
services are provided.

We recognize revenue in accordance with Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION and SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE
REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. Revenues from
software product license agreements are recognized upon execution of a license
agreement and delivery of the software, provided that the fee is fixed or
determinable and deemed collectible by management. If conditions for acceptance
are required subsequent to delivery, revenues are recognized upon customer
acceptance if such acceptance is not deemed to be perfunctory. In multiple
element arrangements, we use the residual value method in accordance with SOP
97-2 and SOP 98-9. Revenues from software maintenance agreements are recognized
ratably over the term of the maintenance period, which is typically one year. We
enter into reseller arrangements that typically provide for sublicense fees
payable to us based upon a percentage

of our list price. Revenues are recognized under reseller agreements as earned
which is generally ratably over the life of the reseller agreement for
guaranteed minimum royalties or based upon unit sales by the resellers. We do
not grant our resellers the right of return or price protection. Revenues from
professional service arrangements are recognized on either a time and materials
or percentage-of-completion basis as the services are performed, provided that
amounts due from customers are fixed or determinable and deemed collectible by
management. Amounts collected prior to satisfying the above revenue recognition
criteria are reflected as deferred revenue. Unbilled services represent service
revenues that have been earned by us in advance of billings.

Services revenues have increased primarily due to the expansion of our
service capabilities by hiring additional service personnel and the increase in
the number of customers using our ATG Dynamo products. Sales of ATG Dynamo
products often lead to sales of consulting services and software maintenance and
support. To date, substantially all of our Dynamo customers have entered into
annual software maintenance and support agreements at the time of purchase and
have renewed such maintenance and support contracts in subsequent periods. We
believe that growth of our product license sales depends on our ability to
provide customers with support, training, consulting and implementation services
and to educate systems integrators and resellers on how to use and install our
products. We have invested significantly in expanding our services organization.

We currently maintain offices in Australia, Canada, England, France,
Germany, Japan, Korea, the Netherlands, Sweden, and the United States. Revenues
from customers outside the United States accounted for 7% of our total revenues
in 1999, 23% in 2000 and 34% in 2001. In 2001, we began entering into contracts
denominated in foreign currencies. We currently do not have hedging or similar
arrangements to protect us against foreign currency fluctuations. We, therefore,
increasingly may become subject to currency fluctuations, which could harm our
operating results in future periods.

CRITICAL ACCOUNTING POLICIES

This management's discussion and analysis of financial condition and results
of operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management evaluates its
estimates and judgments, including those related to revenue recognition,
research and development costs, restructuring expenses, the impairment of long
lived assets and income taxes. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies most significantly
affect the portrayal of our financial condition and require management's most
difficult and subjective judgments.

REVENUE RECOGNITION

Not only is revenue recognition a key component of our results of
operations, the timing of our revenue recognition also determines the timing of
certain expenses, such as commissions. In measuring revenues, we follow the
specific guidelines of SOP 97-2 and related authoritative literature, as
discussed above. Certain judgments of management, however, affect the
application of this policy. Revenue results are difficult to predict and any
shortfall or delay in recognizing revenue could cause our operational results to
vary significantly from quarter to quarter and could result in future operating
losses. We maintain allowances for estimated losses resulting from the inability
of our customers to

make required payments, however, if the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required.

RESEARCH AND DEVELOPMENT COSTS

We evaluate the establishment of technological feasibility of our products
in accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO
BE SOLD, LEASED, OR OTHERWISE MARKETED. We sell products in a market that is
subject to rapid technological change, new product development and changing
customer needs; accordingly, we have concluded that technological feasibility is
not established until the completion of a working model. The time period during
which costs can be capitalized, from the point of reaching technological
feasibility until the time of general product release, is very short and,
consequently, the amounts that can be capitalized are not material to our
financial position or results of operations. Therefore, we have charged all such
costs to research and development in the period incurred.

RESTRUCTURING EXPENSES

In calculating our restructuring expenses, we made several material
estimates to determine the value of certain charges. For example, we estimated
the vacancy period and sublease income rate for our facility related charges.
Our estimates were developed with input from real estate professionals familiar
with current market conditions of the restructured facilities. However, if real
estate market conditions changed unexpectedly, an adjustment to the charge would
be necessary and this could effect our financial statements. Note 11 to our
consolidated financial statements included in this report contains a full
description of our 2001 restructuring charges.

IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS

As a result of our restructuring activities, we evaluated the realizability
of our long-lived assets including fixed assets related to our restructured
facility leases and intangible assets consisting primarily of unamortized
goodwill. We determined that $7.7 million of leasehold improvements and
$2.2 million of furniture, fixtures and equipment were impaired as a result of
these restructured operating leases. In addition we determined that
approximately $1.4 million of purchased software was impaired due to our revised
product development strategy. Lastly we wrote-off the remaining unamortized
goodwill totaling approximately $4.0 million associated with two professional
service acquisitions completed in fiscal year 2000.

ACCOUNTING FOR INCOME TAXES

We record a valuation allowance against our deferred tax asset to the extent
management believes it is more likely than not that the asset will not be
realized. As of December 31, 2001, we have provided a full valuation allowance
against our deferred tax assets due to the uncertainty of their realizability.

Note 1 to our consolidated financial statements included in this report
contains a full description of all our significant accounting policies.

RESULTS OF OPERATIONS

The following table sets forth statement of operations data as percentages
of total revenues for the periods indicated:

YEAR ENDED
DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------

Revenues:
Product license......................................... 58% 74% 55%
Services................................................ 42 26 45
---- --- ----
Total revenues........................................ 100 100 100
Cost of revenues:
Product license......................................... 25 2 3
Services................................................ 32 21 33
---- --- ----
Total cost of revenues................................ 57 23 36
---- --- ----
Gross margin............................................ 43 77 64
---- --- ----
Operating expenses:
Research and development................................ 20 12 22
Sales and marketing..................................... 50 45 67
General and administrative.............................. 17 14 17
Stock-based compensation................................ 3 1 1
Restructuring........................................... -- -- 55
---- --- ----
Total operating expenses.............................. 90 72 162
---- --- ----
Income (loss) from operations............................. (47) 5 (98)
Interest and other income (expense), net.................. 6 6 4
---- --- ----
Income (loss) before provision for income taxes........... (41) 11 (94)
Provision for income taxes................................ -- 2 17
---- --- ----
Net income (loss)......................................... (41)% 9% (111)%
==== === ====

The following table sets forth, for the periods indicated, the cost of
product license revenues as a percentage of product license revenues and the
cost of services revenues as a percentage of services revenues:

YEAR ENDED
DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------

Cost of product license revenues........................... 44% 3% 6%
Cost of services revenues.................................. 76 83 74

YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

REVENUES

Total revenues decreased 15% from $163.3 million in 2000 to $138.9 million
in 2001. The decrease was primarily attributable to the slowing economy and
reduced information technology spending among our customer base. In the third
quarter of 2001, we released ATG Dynamo 5.5 e-Business Platform Version, ATG
Portal Server, ATG Enterprise Commerce Suite and ATG Consumer Commerce Suite.
Revenues generated from international customers increased to $47.6 million, or
347% of total revenues, in 2001 from $37.6 million, or 23% of total revenues, in
2000. We expect total revenues to remain flat in 2002 and the trend of
international revenues as a percentage of total revenues to be consistent with
2001.

Total revenues increased 409% from $32.1 million in 1999 to $163.3 million
in 2000. The increase was primarily attributable to market acceptance of our ATG
Dynamo suite of products as we continued to cultivate relationships with systems
integrators and train our partner channels to support our products.
Additionally, global expansion and the release of our ATG Dynamo 5 products in
September 2000, contributed to our 2000 revenue growth. Revenues generated from
international customers increased to $37.6 million in 2000 from $2.2 million in
1999.

No individual customer accounted for more than 10% of total revenues in
2001, 2000, or 1999.

PRODUCT LICENSE REVENUES

Product license revenues decreased 37% to $76.6 million in 2001 from
$121.5 million in 2000. The decrease was primarily attributable to the slowing
economy and reduced information technology spending among our customer base.
Product license revenues generated from international customers decreased
slightly to $26.4 million in 2001 from $27.1 million in 2000. We expect product
license revenues to remain flat in 2002.

Product license revenues increased 553% to $121.5 million in 2000 from
$18.6 million in 1999. The increase was primarily attributable to the rapid
growth in our partner channel, as well as increased sales to larger enterprises
and international customers. Product license revenues generated from
international customers increased to $27.1 million in 2000 from $1.2 million in
1999. We also experienced an increase in the number of individual license
arrangements under which the initial license fee was in excess of $1 million.
Additionally, the 2000 increase was attributable to the market acceptance of ATG
Dynamo 5, which was released in September 2000.

Product license revenues as a percentage of total revenues for the years
ended December 31, 2001, 2000 and 1999 were 55%, 74% and 58%, respectively. We
expect this percentage in 2002 to be consistent with 2001.

SERVICES REVENUES

Services revenues increased 49% to $62.2 million in 2001 from $41.8 million
in 2000. Professional services revenues increased 27% to $24.0 million in 2001
from $18.9 million in 2000. The increase in professional services revenues was
primarily attributable to growth in our services customer base and an increase
in the resources of our professional services staff. Software maintenance and
support revenues increased 97% to $32.9 million in 2001 from $16.7 million in
2000. The increase in software maintenance and support revenues was the result
of product sales and support renewals resulting from an expanded installed
customer base. Training revenues decreased 18% to $5.1 million in 2001 from
$6.2 million in 2000. The decrease in training revenues was primarily
attributable to the slowing of the economy and reduced information technology
spending among our customer base. We expect services revenues to remain at the
same level in 2002.

Services revenues increased 210% from $13.5 million in 1999 to
$41.8 million in 2000. Professional services revenues increased 95% from
$9.7 million in 1999 to $18.9 million in 2000. The increase in professional
services revenues was primarily attributable to the continued growth of our
customer base and an increase in resources in our professional services group
including the acquisition of The Toronto Technology Group, Inc. Software
maintenance and support revenues increased 496% from $2.8 million in 1999 to
$16.7 million in 2000. The increase in software maintenance and support revenues
was the result of continued increases in product revenues that generate software
maintenance and support revenues and increases in software maintenance and
support renewals. Training revenues increased 463% from $1.1 million in 1999 to
$6.2 million in 2000. The increase in training revenues was primarily
attributable to our extended training program offerings. Additionally, our
acquisition of Petronio Technology Group in May 2000 provided us with additional
Java, J2EE and XML courseware, as well

as strengthened our training capabilities with the addition of seasoned trainers
and curriculum developers.

Services revenues as a percentage of total revenues for the years ended
December 31, 2001, 2000, and 1999 were 45%, 26% and 42%, respectively. We expect
this percentage to remain constant at about 45% in 2002.

COST OF PRODUCT LICENSE REVENUES

Cost of product license revenues increased 35% to $4.6 million in 2001 from
$3.4 million in 2000. This increase primarily related to increased compensation
and benefit costs associated with sustaining engineering activities. In
February 2000, we settled a lawsuit filed by BroadVision in December 1998, which
alleged that we were infringing on a patent for a method of conducting
e-commerce. As part of the settlement, we agreed to pay BroadVision a total of
$15.0 million in license fees, which are being accounted for as cost of product
license revenues. For 2001, approximately half of our cost of product license
revenues related to the BroadVision settlement. We will pay BroadVision an
additional $500,000 per quarter through the fourth quarter of 2002.

Cost of product license revenues decreased to $3.4 million in 2000 from
$8.2 million in 1999. For the year ended December 31, 2000, approximately
$2.3 million related to the BroadVision settlement, which was included in cost
of product license revenues. We paid BroadVision $750,000 per quarter in 2000.
Cost of product license revenues also includes costs associated with supporting
the current release of the ATG Dynamo suite of products.

For 2001, 2000 and 1999, cost of product license revenues as a percentage of
total revenues were 3%, 2% and 25%, respectively. We anticipate the cost of
product license revenues, as a percentage of total revenues, will remain flat in
2002.

COST OF SERVICES REVENUES

Cost of services revenues includes salary and other related costs for our
professional services and technical support staff, as well as third-party
contractor expenses. Cost of services revenues will vary significantly from year
to year depending on the level of professional services staffing, the effective
utilization rates of our professional services staff, the mix of services
performed, including product license technical support services, the extent to
which these services are performed by us or by third-party contractors, and the
level of third-party contractors fees.

Cost of services revenues increased 32% to $45.9 million in 2001 from
$34.7 million in 2000. Approximately 50% of the increase was related to
compensation and benefit costs attributable to continued growth in our
professional services group resources. Facility and other allocated fixed costs
such as rent, depreciation, and telecommunication costs increased by
approximately 60%. Travel, entertainment and recruiting costs decreased by
approximately 10%.

Cost of services revenues increased 240% to $34.7 million in 2000 from
$10.2 million in 1999. The increase was attributable to growth in our
professional services group resources. Approximately 61% of the increase was
related to compensation and benefit costs. Approximately 39% of the increase was
due to travel, recruiting, hiring and training.

For 2001, 2000 and 1999, cost of services revenues as a percentage of total
revenues were 33%, 21% and 32%, respectively. We anticipate the cost of services
revenues, as a percentage of total revenues, will decline in 2002.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist primarily of salary and related
costs to support product development. To date, all software development costs
have been expensed as research and development in the period incurred.

Research and development expenses increased 58% to $30.1 million in 2001
from $19.0 million in 2000. The increase was primarily due to the research and
development expenses associated with our ATG Dynamo 5.5 products and our ATG
Portals server which we began shipping in the third quarter of 2001.
Approximately 50% of the increase was attributable to compensation and benefits.

Approximately 10% of the increase was attributable to professional service
costs. The remaining 40% increase related primarily to facility and other
allocated fixed costs such as rent, depreciation, and telecommunication costs.
In 2002, we expect our research and development costs to decline over 2001.

Research and development expenses increased 202% to $19.0 million in 2000
from $6.3 million in 1999. The increase was primarily due to the research and
development expenses associated with our Dynamo 5 e-Business Platform, which we
announced in July 2000 and began shipping in September 2000. Approximately 73%
of the increase was related to compensation and benefit costs. Costs also
increased for travel, recruiting, hiring and training.

For 2001, 2000 and 1999, research and development expenses as a percentage
of total revenues were 22%, 12% and 20%, respectively. Based on cost reduction
initiatives, we anticipate that research and development expenses as a
percentage of total revenues will decline in 2002.

SALES AND MARKETING EXPENSES

Sales and marketing expenses consist primarily of salaries, commissions and
other related costs for sales and marketing personnel, travel, public relations
and marketing materials and events.

Sales and marketing expenses increased 27% to $93.2 million in 2001 from
$73.3 million in 2000. Approximately half of the increase was due to increased
compensation and benefit costs, and the remaining 50% of the increase was
related to increased facilities and other allocated fixed costs such as rent,
depreciation and telecommunication. Due to the recent cost reduction
initiatives, we expect sales and marketing expenses to decline in 2002.

Sales and marketing expenses increased 361% to $73.3 million in 2000 from
$15.9 million in 1999. The increase was associated primarily with international
sales and marketing expansion, global hiring, advertising efforts, branding and
increased commissions. Approximately 47% of the increase was related to
compensation and benefit costs, and 28% of the increase was related to marketing
and promotional expenses. Additionally, costs increased due to travel,
recruiting, hiring and training.

For 2001, 2000 and 1999, sales and marketing expenses as a percentage of
total revenues were 67%, 45% and 50%, respectively. We expect that sales and
marketing expenses will decease as a percentage of total revenues to reflect
projected revenue levels for 2002 and subsequent years. However sales and
marketing expenses can fluctuate as a percentage of total revenues depending on
economic conditions, level and timing of global expansion, program spending, the
rate at which new sales personnel become productive and the level of revenue
growth.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses consist primarily of salaries and other
related costs for operations and finance employees and legal and accounting
fees.

General and administrative expenses increased 5% to $24.0 million in 2001
from $22.8 million in 2000. The increase was primarily related to compensation
and benefit costs. Due to recent cost reduction activities we expect general and
administrative expenses to decline in 2002.

General and administrative expenses increased 330% to $22.8 million in 2000
from $5.3 million in 1999. Approximately 48% of the increase was related to
increases in personnel and related expenses, driven by expansion both
domestically and internationally. Approximately 13% of the increase was related
to an increase in consultant expenses. Additionally, a portion of the increase
was due to recording additional allowances for doubtful accounts as a result of
the increases in revenues and the potential for a slowdown in the economy.

For 2001, 2000 and 1999, general and administrative expenses as a percentage
of total revenues were 17%, 14% and 17%, respectively. Due to cost reduction
initiatives we anticipate that general and administrative expenses will decrease
as a percentage of total revenues in 2002.

STOCK-BASED COMPENSATION

Since the fourth quarter of 1998, we have recorded total deferred
stock-based compensation of $4.9 million in connection with stock option grants.
These amounts represent the difference between the exercise price of certain
stock option grants and the deemed fair value for accounting purposes of our
common stock at the time of these grants. Additionally, in July 2000, we
recorded deferred stock-based compensation of $2.0 million for unvested stock
options acquired in connection with the acquisition of the Toronto Technology
Group, Inc. The number of these stock options has been reduced, due to the
recipients of these grants terminating their employment with us. We are
amortizing these amounts over the vesting periods of the applicable options.

Stock-based compensation expense remained consistent at $1.3 million in 2000
and 2001. We expect stock-based compensation expense to decrease to
approximately $550,000 in 2002 as a result of the restructuring that took place
in 2001.

Stock-based compensation expense increased 18% to $1.3 million in 2000 from
$1.1 million in 1999. This increase was due to the timing of our recording of
stock-based compensation and the options acquired in connection with the
acquisition of The Toronto Technology Group, Inc.

RESTRUCTURING EXPENSES

We undertook plans to restructure our operations during 2001, as a result of
a global slowdown in information technology spending. Actions we have taken
include: consolidation of excess facilities, a worldwide workforce reduction,
the write-off of certain unrealizable assets and settling certain obligations
that have no future benefit. In the second quarter, we recorded a restructuring
charge of $44.2 million, and in the fourth quarter of 2001, we recorded a
restructuring charge of $32.7 million. Total restructuring charges for the year
were $76.9 million.

The significant components of the restructuring charge (in thousands):

RESTRUCTURING CHARGES ACCRUED
-------------------------------------------- RESTRUCTURING
QUARTER ENDED QUARTER ENDED YEAR ENDED AS OF
JUNE 30, DECEMBER 31, DECEMBER 31, PAYMENTS OR DECEMBER 31,
2001 2001 2001 WRITE OFFS 2001
------------- ------------- ------------ ----------- -------------

Facilities-related costs...... $38,100 $22,818 $60,918 $16,208 $44,710
Employee severance, benefits
and related costs........... 4,757 3,181 7,938 6,748 1,190
Asset impairments............. 212 5,358 5,570 5,570 --
Exchangeable share
settlement.................. -- 1,263 1,263 1,263 --
Marketing costs............... 851 -- 851 851 --
Legal and accounting costs.... 315 90 405 232 173
------- ------- ------- ------- -------
Total......................... $44,235 $32,710 $76,945 $30,872 $46,073
======= ======= ======= ======= =======

The facilities-related cost component consisted of idle lease space and
termination payments for offices worldwide, which are no longer required as a
result of a reduction in personnel. In determining the facilities-related costs,
we estimated the vacancy period and sublease income. A component of the fourth
quarter facility-related cost was a change in estimate of the second quarter
facility-related restructuring charge. The net change in estimate was an
additional charge of $1.5 million in the fourth quarter. Of the $1.5 million
charge, a credit of $8.2 million was realized due to the buy out of a lease in
the second quarter. We agreed to pay $9.3 million ratably over 4.5 years in
relation to the buyout. This credit was offset by an increase of approximately
$9.7 million due to updated assumptions, as a result of a market analysis, in
decreased sublease rates and increased vacancy periods for two leases provided
for in the second quarter expense. A component of the $60.9 million
facility-related restructuring costs, relates to the write-off of the abandoned
net book value of leasehold improvements and fixed assets of $7.7 million and
$2.2 million, respectively. These fixed assets were directly related to the
restructured excess office facilities.

The employee severance cost component of the restructuring charge was
related to reductions in personnel. As part of the restructuring, the employment
of 530 employees, or 46% of our workforce, was terminated. Approximately 47% of
these employees were from sales and marketing, 22% from services, 19% from
general and administrative and 11% from research and development.

The asset impairment-related costs included the write-off of the remaining
unamortized goodwill totaling approximately $4.0 million was related to the two
professional service acquisitions completed in 2000. In addition we determined
that approximately $1.4 million of purchased software was deemed impaired due to
our revised product development strategy.

We settled 11,762 exchangeable shares with a certain employee. Upon
settlement, we recorded $1.3 million as a charge to restructuring.

At December 31, 2001, we had an accrued restructuring liability of
$46.1 million, of which $32.7 million was long term. The majority of the
remaining liability is comprised of facility-related costs.

INTEREST AND OTHER INCOME, NET

Interest income decreased 45% to $5.0 million in 2001 from $9.0 million in
2000. The decrease was primarily due to a decrease in our average cash and
marketable securities balances in 2001 as compared to 2000, coupled with lower
earned interest rates.

Interest income increased 350% to $9.0 million in 2000 from $2.0 million in
1999. The increase was primarily the result of two public offerings completed in
July 1999 and November 1999, from which

we received net proceeds of approximately $153.3 million. These proceeds were
invested primarily in cash, cash equivalents and marketable securities.
Additionally, the positive cash flow from operations also contributed to the
increase in interest income.

Interest expense decreased to zero in 2000 from $121,000 in 1999. The
decrease was related to the repayment of outstanding indebtedness in 1999 with
the proceeds from our initial public offering.

PROVISION FOR INCOME TAXES

We incurred net operating losses for four quarters in 2001. Due to the
uncertainty surrounding the utilization of our net deferred tax assets, net
operating losses and research credits carryforwards, we have recorded a 100%
valuation allowance. The provision recorded for the year ended December 31, 2001
represents this valuation allowance and foreign taxes attributable to our
foreign sales affiliates.

LIQUIDITY AND CAPITAL RESOURCES

Our capital requirements relate primarily to facilities, employee
infrastructure and working capital requirements. Historically, we have funded
our cash requirements primarily through the public and private sales of equity
securities, commercial credit facilities and capital leases. In 2001, we also
funded our cash requirements in part from operations. At February 28, 2002, we
had $48.4 million in cash and cash equivalents and $27.7 million in marketable
securities.

Cash used by operating activities was $54.6 million in 2001. This consisted
of operating losses of $156.0 million, offset by a reduction in accounts
receivable of $21.9 million, accrued restructuring of $46.1 million, deferred
income taxes of $23.9 million, depreciation and amortization of $9.4 million,
and by other operating sources of funds of $197,000. Cash provided by operating
activities was $18.3 million in 2000. This consisted of operating income of
$14.5 million and changes in working capital including cash provided by
increases in accrued expenses of $24.7 million and deferred revenue of
$14.4 million offset by cash used to fund an increase in accounts receivable of
$39.9 million.

Our investing activities for 2001 consisted primarily of capital
expenditures of $12.6 million, offset by net sales of marketable securities of
$76.9 million and a reduction in other assets of $2.8 million. Our investing
activities for 2000 consisted primarily of capital expenditures of
$21.7 million, net purchases of marketable securities of $66.4 million and
$5.8 million used to acquire the Toronto Technology Group, Inc. and Petronio
Technology Group. To support growth in headcount and global expansion, assets
acquired in both 2000 and 2001 consisted principally of leasehold improvements,
computer hardware and software. We expect that capital expenditures will total
approximately $2.0 million over the next twelve months.

Through December 2001, we had a revolving line of credit with a bank, under
which we could borrow up to $12.5 million or 80% of eligible accounts
receivable. Borrowings bore interest at the bank's prime rate, 4.75% at
December 31, 2001. The revolving line of credit was collateralized by
substantially all our assets. Effective July 23, 2001, we modified the terms of
the line of credit with the bank to eliminate all financial covenants. As part
of the modification, we agreed to provide 100% cash collateral for all our
outstanding letters of credit, which totaled $16.8 million as of December 31,
2001. This collateral is related to our operating lease obligations. The
revolving line of credit expired in December 2001. We are currently in
negotiations for a new $15.0 million covenant-based revolving line of credit.

In September 2000, we entered into a non-recourse receivables purchase
agreement with a bank, under which we could sell up to $10.0 million of our
accounts receivable to the bank. Under the terms of the receivables purchase
agreement; we sold certain accounts receivable, subject to acceptance by the
bank, on a non-recourse basis. Upon purchase, the bank assumed the risk of
collection for the acquired accounts receivable except in the event we violated
the terms of the receivables purchase agreement or

the customer asserted a discount, allowance, warranty claim or right of return.
The accounts receivable were sold at a discount to reflect a minimum of 45 days
and a maximum of 135 days at the bank's prime rate plus 1%. During the year
ended December 31, 2000, we sold $9.6 million of accounts receivable to the bank
under this agreement. As of February 28, 2001, all of these receivables had been
collected. For the year ended December 31, 2000, we incurred approximately
$166,000 in expenses related to this transaction. This agreement expired in
September 2001 and was not renewed.

Net cash provided by financing activities was $0.7 million in 2001,
principally representing proceeds from stock option exercises and the employee
stock purchase plan, offset in part by payments on long-term obligations to
BroadVision. Net cash provided by financing activities was $3.6 million in 2000,
principally representing proceeds from stock option exercises and the employee
stock purchase plan, offset in part by payments on long-term obligations to
BroadVision.

We lease our facilities under operating leases that expire between 2003 and
2011. The aggregate minimum annual rental payment under these leases is
$104.8 million, which includes approximately $16.7 million payable in 2002. Of
the $104.8 million, $65.1 million is included in restructuring and is offset by
approximately $20.4 million in expected sublease income. For additional
information relating to our commercial and contractual commitments, see notes 7
and 11 to our consolidated financial statements included in this report.

CONTRACTUAL OBLIGATIONS

At December 31, 2001, our contractual cash obligations were as follows (in
thousands):

PAYMENTS DUE BY PERIOD
--------------------------------------------------------
LESS THAN 1 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS YEARS YEARS
----------------------- -------- ----------- --------- -------- --------

Lease Commitments........................... $104,804 $16,749 $31,655 $29,629 $26,771
BroadVision Settlement...................... $ 2,000 $ 2,000 $ -- $ -- $ --

We believe that our existing financial resources, together with cash
generated by our operations, will be able to meet our cash requirements for at
least the next twelve months. However, our actual cash requirements will depend
on many factors, including particularly overall economic conditions both
domestically and abroad. We may seek additional external funds through public or
private securities offerings, strategic alliances or other financing sources.
There can be no assurance that if we seek external funding, it will be available
on favorable terms, if at all.

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 141, BUSINESS COMBINATIONS requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method. The
adoption of SFAS No. 141 did not have a material impact on our consolidated
financial statements.

Under SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, goodwill is no
longer subject to amortization over its estimated useful life. Rather, goodwill
is subject to at least an annual assessment for impairment by applying a
fair-value-based test. Also under SFAS No. 142, intangible assets acquired in
conjunction with a business combination should be separately recognized if the
benefit of the intangible asset is obtained through contractual or other legal
rights, or if the intangible asset can be sold, transferred, licensed, rented or
exchanged, regardless of the acquirer's intent to do so. Intangible assets will
continue to be amortized over their respective useful lives under SFAS No. 142.
We must adopt SFAS No. 142 on January 1, 2002. We do not anticipate that the
adoption of SFAS No. 142 will have a material impact on our financial
statements.

SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144

supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
LONG-LIVED ASSETS TO BE DISPOSED OF, but retains SFAS No. 121's fundamental
provisions for (a) recognition and measurement of impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. SFAS No.144 also supersedes the accounting/reporting
provisions of Accounting Principles Board (APB) Opinion No. 30, REPORTING THE
RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF A DISPOSAL OF A SEGMENT OF A
BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND
TRANSACTIONS, for segments of a business to be disposed of but retains APB
No. 30's requirement to report discontinued operations separately from
continuing disposing operations and extends that reporting period to a component
of an entity that either has been disposed of or is classified as held for sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years. We do not anticipate that the
adoption of SFAS No. 144 will have a material impact on our financial
statements.

In November 2001, the Emerging Issues Task Force issued Topic No. D-103
relating to the accounting for reimbursements received for out-of-pocket
expenses. In accordance with Topic No. D-103, reimbursements received for out of
pocket expenses incurred should be characterized as revenue in the statement of
operations. We historically have accounted for reimbursements received and
reimbursement of these expenses to employees as off-setting expenses to costs of
revenues. We will adopt Topic No. D-103 in the financial reporting periods
beginning after December 31, 2001 and comparative financial statements for the
periods will be reclassified to comply with the guidance in Topic No. D-103.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The majority of our operations are based in the U.S. and, accordingly, the
majority of our transactions are denominated in U.S. dollars. However, we have
foreign-based operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. The impact of fluctuations in the relative value
of other currencies was not material for each of the three years ended
December 31, 2001. We do not use derivative financial instruments for investment
purposes and only invest in financial investments that meet high credit quality
standards, as specified in our investment policy guidelines; the policy also
limits the amount of credit exposure to any one issue, issuer, and type of
instrument.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
Art Technology Group, Inc.:

We have audited the accompanying consolidated balance sheets of Art
Technology Group, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity (deficit) and comprehensive income (loss) and
cash flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Art
Technology Group, Inc. and subsidiaries as of December 31, 2000 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

/s/ Arthur Andersen LLP

Boston, Massachusetts
January 22, 2002

ART TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE INFORMATION)

DECEMBER 31,
-------------------
2000 2001
-------- --------

ASSETS
Current Assets:
Cash and cash equivalents................................. $ 53,255 $ 66,250
Marketable securities..................................... 73,218 14,057
Accounts receivable, net of reserves of approximately
$2,655 and $3,539 at December 31, 2000 and 2001,
respectively............................................ 52,440 30,532
Unbilled services......................................... 1,273 274
Prepaid expenses and other current assets................. 4,222 5,541
Deferred tax assets....................................... 3,556 --
-------- --------
Total current assets.................................... 187,964 116,654
-------- --------
Property and Equipment, Net................................. 23,492 16,171
Long-Term Marketable Securities............................. 17,734 --
Other Assets................................................ 13,246 4,663
Deferred Tax Assets, net of current portion................. 17,079 --
-------- --------
$259,515 $137,488
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations............... $ 2,000 $ 2,000
Accounts payable.......................................... 11,375 4,160
Accrued expenses.......................................... 29,402 24,718
Deferred revenue.......................................... 22,765 17,628
Accrued restructuring, short-term......................... -- 13,398
-------- --------
Total current liabilities............................... 65,542 61,904
-------- --------
Long-Term Obligations, Less Current Maturities.............. 2,000 --
-------- --------
Accrued Restructuring, less current portion................. -- 32,675
-------- --------
Commitments and Contingencies (Note 3 and 7)
Stockholders' Equity:
Preferred stock, $0.01 par value
Authorized--10,000,000 shares
Issued and outstanding--no shares....................... -- --
Common stock, $0.01 par value
Authorized--500,000,000 shares
Issued and outstanding--67,894,357 shares and 68,982,030
shares at December 31, 2000 and 2001, respectively...... 679 689
Additional paid-in capital................................ 209,338 214,597
Deferred compensation..................................... (3,670) (1,558)
Accumulated deficit....................................... (14,374) (170,379)
Accumulated other comprehensive loss...................... -- (440)
-------- --------
Total stockholders' equity.............................. 191,973 42,909
-------- --------
$259,515 $137,488
======== ========

The accompanying notes are an integral part of these consolidated financial
statements.

ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE INFORMATION)

YEAR ENDED DECEMBER 31,
--------------------------------
1999 2000 2001
-------- --------- ---------

Revenues:
Product license........................................... $ 18,590 $ 121,525 $ 76,631
Services.................................................. 13,487 41,817 62,238
-------- --------- ---------
Total revenues.......................................... 32,077 163,342 138,869
-------- --------- ---------
Cost of Revenues:
Product license........................................... 8,160 3,426 4,616
Services.................................................. 10,232 34,739 45,892
-------- --------- ---------
Total cost of revenues.................................. 18,392 38,165 50,508
-------- --------- ---------
Gross profit............................................ 13,685 125,177 88,361
-------- --------- ---------
Operating Expenses:
Research and development.................................. 6,343 18,966 30,119
Sales and marketing....................................... 15,921 73,261 93,186
General and administrative................................ 5,323 22,791 23,952
Stock-based compensation.................................. 1,127 1,273 1,280
Restructuring............................................. -- -- 76,945
-------- --------- ---------
Total operating expenses................................ 28,714 116,291 225,482
-------- --------- ---------
Income (loss) from operations........................... (15,029) 8,886 (137,121)
Interest and other Income, net.............................. 1,897 8,979 4,967
-------- --------- ---------
Income (loss) before provision for income taxes........... (13,132) 17,865 (132,154)
Provision for Income Taxes.................................. -- 3,378 23,851
-------- --------- ---------
Net income (loss)......................................... (13,132) 14,487 (156,005)
Accretion of Dividends, Discount and Offering Costs on
Preferred Stock........................................... (4,395) -- --
-------- --------- ---------
Net income (loss) available for common stockholders....... $(17,527) $ 14,487 $(156,005)
======== ========= =========
Net Income (Loss) Per Share:
Basic..................................................... $ (0.45) $ 0.22 $ (2.27)
======== ========= =========
Diluted................................................... $ (0.45) $ 0.20 $ (2.27)
======== ========= =========
Weighted Average Common Shares Outstanding:
Basic..................................................... 38,777 66,932 68,603
======== ========= =========
Diluted................................................... 38,777 73,138 68,603
======== ========= =========

The accompanying notes are an integral part of these consolidated financial
statements.

ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE INFORMATION)

SERIES A&C
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------- ADDITIONAL
NUMBER CARRYING NUMBER $0.01 PAR PAID-IN DEFERRED ACCUMULATED
OF SHARES VALUE OF SHARES VALUE CAPITAL COMPENSATION DEFICIT
---------- -------- ---------- --------- ---------- ------------- ------------

Balance, December 31, 1998............ 2,756,789 $ 2,861 18,256,110 $183 $ 5,948 $(1,692) $(11,334)
Accretion of Series B and Series D
redeemable convertible preferred
stock redemption value.............. -- -- -- -- -- -- (2,576)
Exercise of stock options............. -- -- 1,956,820 20 815 -- --
Exercise of warrant................... -- -- 314,476 3 (3) -- --
Deferred compensation related to stock
option grants....................... -- -- -- -- 3,063 (3,063) --
Amortization of deferred
compensation........................ -- -- -- -- -- 1,127 --
Conversion of preferred stock into
common stock........................ (2,756,789) (2,861) 31,419,278 314 13,436 -- --
Common stock issued to the holders of
Series C convertible preferred stock
and Series D redeemable convertible
preferred stock in lieu of special
payments (Note 5)................... -- -- 242,500 2 1,817 -- (1,819)
Initial and follow-on public offerings
of common stock..................... -- -- 13,361,840 134 153,142 -- --
Comprehensive Loss:
Net loss.............................. -- -- -- -- -- -- (13,132)
Comprehensive loss for year ended
December 31, 1999................... -- -- -- -- -- -- --
---------- ------- ---------- ---- -------- ------- --------
Balance, December 31, 1999............ -- -- 65,551,024 656 178,218 (3,628) (28,861)
Exercise of stock options including
$23,057 related to the income tax
benefit of disqualifying
dispositions........................ -- -- 2,164,234 21 27,705 -- --
Issuance of common stock in connection
with Employee stock purchase plan... -- -- 179,099 2 1,881 -- --
Shares and options issued in
connection with the acquisition of
Toronto Technology Group, Inc.
(Note 6)............................ -- -- -- -- 2,238 (2,019) --
Amortization of deferred
compensation........................ -- -- -- -- -- 1,273 --
Reversal of deferred compensation..... -- -- -- -- (704) 704 --
Comprehensive Income:
Net income............................ -- -- -- -- -- -- 14,487
Comprehensive income for year ended
December 31, 2000................... -- -- -- -- -- -- --
---------- ------- ---------- ---- -------- ------- --------
Balance, December 31, 2000............ -- -- 67,894,357 679 209,338 (3,670) (14,374)

ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE EQUITY COMPREHENSIVE
LOSS (DEFICIT) INCOME (LOSS)
-------------- ------------- --------------

Balance, December 31, 1998............ $ -- $ (4,034)
Accretion of Series B and Series D
redeemable convertible preferred
stock redemption value.............. -- (2,576)
Exercise of stock options............. -- 835
Exercise of warrant................... --
Deferred compensation related to stock
option grants....................... -- --
Amortization of deferred
compensation........................ -- 1,127
Conversion of preferred stock into
common stock........................ -- 10,889
Common stock issued to the holders of
Series C convertible preferred stock
and Series D redeemable convertible
preferred stock in lieu of special
payments (Note 5)................... -- --
Initial and follow-on public offerings
of common stock..................... -- 153,276
Comprehensive Loss:
Net loss.............................. -- (13,132) $(13,132)
--------
Comprehensive loss for year ended
December 31, 1999................... -- -- $(13,132)
---- -------- ========
Balance, December 31, 1999............ -- 146,385
Exercise of stock options including
$23,057 related to the income tax
benefit of disqualifying
dispositions........................ -- 27,726
Issuance of common stock in connection
with Employee stock purchase plan... -- 1,883
Shares and options issued in
connection with the acquisition of
Toronto Technology Group, Inc.
(Note 6)............................ -- 219
Amortization of deferred
compensation........................ -- 1,273
Reversal of deferred compensation..... -- --
Comprehensive Income:
Net income............................ -- 14,487 $ 14,487
--------
Comprehensive income for year ended
December 31, 2000................... -- -- $ 14,487
---- -------- ========
Balance, December 31, 2000............ -- 191,973

ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
INCOME (LOSS) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE INFORMATION)

SERIES A&C
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------- ----------------------- ADDITIONAL
NUMBER CARRYING NUMBER $0.01 PAR PAID-IN DEFERRED ACCUMULATED
OF SHARES VALUE OF SHARES VALUE CAPITAL COMPENSATION DEFICIT
--------- --------- ----------- --------- ---------- ------------- ------------

Exercise of stock options............ -- -- 937,220 9 1,162 -- --
Issuance of common stock in
connection with Employee stock
purchase plan...................... -- -- 131,708 1 1,534 -- --
Shares and options issued in
connection with the acquisition of
Toronto Technology Group, Inc...... -- -- 18,745 -- 2,132 -- --
Settlement of exchangeable shares.... -- -- -- -- 1,263 -- --
Amortization of deferred
compensation....................... -- -- -- -- -- 1,280 --
Reversal of deferred compensation.... -- -- -- -- (832) 832 --
Comprehensive Loss:
Net loss............................. -- -- -- -- -- -- (156,005)
Foreign currency translation
adjustments........................ -- -- -- -- -- -- --
Comprehensive loss for year ended
December 31, 2001.................. -- -- -- -- -- -- --
--------- --------- ----------- ---- -------- ------- ---------
Balance, December 31, 2001........... -- $ -- 68,982,030 $689 $214,597 $(1,558) $(170,379)
========= ========= =========== ==== ======== ======= =========

ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE EQUITY COMPREHENSIVE
LOSS (DEFICIT) INCOME (LOSS)
-------------- ------------- --------------

Exercise of stock options............ -- 1,171
Issuance of common stock in
connection with Employee stock
purchase plan...................... -- 1,535
Shares and options issued in
connection with the acquisition of
Toronto Technology Group, Inc...... -- 2,132
Settlement of exchangeable shares.... -- 1,263
Amortization of deferred
compensation....................... -- 1,280
Reversal of deferred compensation.... -- --
Comprehensive Loss:
Net loss............................. -- (156,005) $(156,005)
Foreign currency translation
adjustments........................ (440) (440) (440)
---------
Comprehensive loss for year ended
December 31, 2001.................. -- -- $(156,445)
----- --------- =========
Balance, December 31, 2001........... $(440) $ 42,909
===== =========

The accompanying notes are an integral part of these consolidated financial
statements.

ART TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
-------- -------- ---------

Cash Flows from Operating Activities:
Net income (loss)......................................... $(13,132) $ 14,487 $(156,005)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities--
Stock-based compensation................................ 1,127 1,273 1,280
Noncash interest expense related to issuance of
warrants............................................... 40 -- --
Depreciation and amortization........................... 836 3,629 9,414
Noncash restructuring charge............................ 16,733
Tax benefit from the exercise of stock options.......... -- 23,057 --
Loss on disposal of fixed assets, net................... 120 27 801
Changes in operating assets and liabilities--
Accounts receivable, net................................ (10,221) (39,901) 21,907
Unbilled services....................................... (491) (491) 998
Prepaid expenses and other current assets............... (1,795) (2,314) (1,318)
Deferred tax assets..................................... -- (20,635) 23,851
Accounts payable........................................ 10,564 90 (7,417)
Accrued expenses........................................ 3,508 24,674 (2,358)
Deferred revenue........................................ 7,459 14,428 (5,136)
Accrued restructuring................................... -- -- 42,689
-------- -------- ---------
Net cash provided by (used in) operating activities... (1,985) 18,324 (54,561)
-------- -------- ---------
Cash Flows from Investing Activities:
(Purchases) Sale of marketable securities, net............ (24,531) (66,421) 76,895
Purchases of property and equipment....................... (5,579) (21,683) (12,616)
Acquisition of Petronio Technology Group, Inc............. -- (600) --
Acquisition of The Toronto Technology Group, Inc.......... -- (5,191) --
(Increase) decrease in other assets....................... (690) 563 2,789
-------- -------- ---------
Net cash provided by (used in) investing activities..... (30,800) (93,332) 67,068
-------- -------- ---------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options................... 835 4,669 1,171
Proceeds from employee stock purchase plan................ -- 1,883 1,535
Payments on long-term obligations......................... -- (3,000) (2,000)
Net proceeds from initial and follow-on public offerings
of common stock......................................... 153,276 -- --
Payments on term loan to a bank........................... (319) -- --
Payments on capital lease obligations..................... (189) -- --
Payments on equipment line of credit...................... (200) -- --
-------- -------- ---------
Net cash provided by financing activities............... 153,403 3,552 706
-------- -------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents........ 120,618 (71,456) 13,213
Effects of Foreign Exchange Rate Changes On Cash and Cash
Equivalents............................................... -- -- (218)
Cash and Cash Equivalents, Beginning of Period.............. 4,093 124,711 53,255
-------- -------- ---------
Cash and Cash Equivalents, End of Period.................... $124,711 $ 53,255 $ 66,250
======== ======== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.................. $ 87 $ -- $ 135
======== ======== =========
Cash paid during the period for income taxes.............. $ -- $ 175 $ 330
======== ======== =========
Supplemental Disclosure of Noncash Investing and Financing
Activities:
Accretion of dividends, discounts and special payments on
Series B, Series C, and Series D convertible preferred
stock................................................... $ 4,395 $ -- $ --
======== ======== =========
Conversion of preferred stock into common stock........... $ 13,750 $ -- $ --
======== ======== =========
Value ascribed to options issued in connection with the
acquisition of The Toronto Technology Group Inc......... $ -- $ 2,238 $ --
======== ======== =========
Reversal of deferred compensation......................... $ -- $ 704 $ 832
======== ======== =========
Income tax effect of disqualifying dispositions........... $ -- $ 23,057 $ --
======== ======== =========
In connection with the acquisition of The Toronto Technology
Group Inc., the following transaction occurred:
Fair value of tangible assets acquired.................... $ -- $ 699 $ --
Intangible assets acquired................................ -- 5,124 --
Liabilities assumed....................................... -- (632) --
-------- -------- ---------
Cash paid for acquisition including acquisition costs..... $ -- $ 5,191 $ --
======== ======== =========

The accompanying notes are an integral part of these consolidated financial
statements.

ART TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Art Technology Group, Inc. (ATG or the Company) is a Delaware company which
was incorporated on December 31, 1991. ATG offers an integrated suite of
Internet customer relationship management and electronic commerce software
applications, as well as related application development, integration and
support services.

The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as described below and elsewhere in
the accompanying notes to the consolidated financial statements.

(a) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
ATG and its wholly owned subsidiaries. All significant intercompany balances
have been eliminated in consolidation.

(b) Use of Estimates

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

On July 26, 1999, ATG closed its initial public offering of 10,000,000
shares of common stock at a public offering price of $6 per share. The net
proceeds to ATG from the offering were approximately $54,302,000. On July 30,
1999, in connection with the exercise of the underwriters' over-allotment
option, ATG issued an additional 336,000 shares of common stock at the initial
public offering price of $6 per share. Net proceeds to ATG from the exercise of
the over-allotment option were approximately $1,875,000. In connection with
ATG's initial public offering in July 1999, all shares of preferred stock were
converted into 31,419,278 shares of common stock.

On November 10, 1999, ATG closed its follow-on public offering of 9,000,000
shares of common stock, of which 2,850,000 shares were sold by the Company at a
public offering price of $33.75. The net proceeds to ATG from the offering were
approximately $91,428,000. On November 22, 1999, in connection with the exercise
of the underwriters' over-allotment option, ATG issued an additional 175,840
shares of common stock at the public offering price of $33.75 per share. Net
proceeds to ATG from the exercise of the over-allotment option were
approximately $5,671,000.

(d) Revenue Recognition

ATG recognizes product license revenue from licensing the rights to use its
software to end-users. ATG also generates service revenues from integrating its
software with its customers' operating environments, the sale of maintenance
services and the sale of certain other consulting and development services. ATG
generally has separate agreements with its customers, which govern the terms and
conditions of its software license, consulting and support and maintenance
services. These separate agreements, along with ATG's price list and business
practices, provide the basis for establishing vendor-specific objective evidence
of fair value. This allows ATG to appropriately allocate fair value among the
multiple elements in an arrangement.

(1) ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
ATG recognizes revenue in accordance with Statement of Position (SOP)
No. 97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-9, MODIFICATION OF SOP 97-2,
SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. Revenues
from software product license agreements are recognized upon execution of a
license agreement and delivery of the software, provided that the fee is fixed
or determinable and deemed collectible by management. If conditions for
acceptance are required subsequent to delivery, revenues are recognized upon
customer acceptance if such acceptance is not deemed to be perfunctory. In
multiple element arrangements, ATG uses the residual value method in accordance
with SOP 97-2 and SOP 98-9. Revenues from software maintenance agreements are
recognized ratably over the term of the maintenance period, which is typically
one year. ATG enters into reseller arrangements that typically provide for
sublicense fees payable to ATG based upon a percentage of ATG's list price.
Revenues are recognized under reseller agreements as earned, which is generally
ratably over the life of the reseller agreement, for guaranteed minimum
royalties or based upon actual sales by the resellers. ATG does not grant its
resellers the right of return or price protection. Revenues from professional
service arrangements are recognized on either a time-and-materials or
percentage-of-completion basis as the services are performed, provided that
amounts due from customers are fixed or determinable and deemed collectible by
management. Unbilled services represent service revenues that have been earned
by ATG in advance of billings. Amounts collected or billed prior to satisfying
the above revenue recognition criteria are reflected as deferred revenue.
Deferred revenue primarily consists of advance payments related to support and
maintenance and service agreements.

(e) Net Income (Loss) Per Share

Net income (loss) per share is computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. Basic net
income (loss) per share is computed by dividing net income (loss) available for
common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income (loss) per share is computed
by dividing net income (loss) available for common stockholders by the weighted
average number of shares of common stock outstanding, including potential common
shares including those from exercise of stock options and warrants using the
treasury stock method, if dilutive. The following table sets forth basic and
diluted net income (loss) per share computational data for the years ended
December 31, 1999, 2000 and 2001 (in thousands, except per-share amounts):

1999 2000 2001
-------- -------- ---------

Net income (loss) available for common stockholders......... $(17,527) $14,487 $(156,005)
======== ======= =========
Weighted average common shares outstanding used in computing
basic net income (loss) per share......................... 38,777 66,932 68,603
Weighted average common equivalent shares outstanding:
Employee common stock options (1)(2)........................ -- 6,206 --
-------- ------- ---------
Total weighted average common and common equivalent shares
outstanding used in computing diluted net income (loss)
per share................................................. 38,777 73,138 68,603
======== ======= =========
Basic net income (loss) per share........................... $ (0.45) $ 0.22 $ (2.27)
======== ======= =========
Diluted net income (loss) per share......................... $ (0.45) $ 0.20 $ (2.27)
======== ======= =========

--------------------------

(1) Options and warrants to purchase a total of 8,348,000 and 13,038,000 common
shares have been excluded from the computation of diluted weighted average
shares outstanding for the years ended December 31, 1999 and 2001,
respectively, as the effect of their inclusion would have been antidilutive.

(2) Options to purchase a total of 3,902,173 weighted shares of common stock
outstanding for the year ended December 31, 2000 were excluded from the
calculation of diluted net income per share because the exercise prices of
those options exceeded the average market price of common stock during the
periods, as the effect of their inclusion would have been antidilutive.

(1) ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
(f) Cash, Cash Equivalents and Marketable Securities

ATG accounts for investments in marketable securities under SFAS No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under SFAS
No. 115, investments for which ATG has the positive intent and the ability to
hold to maturity, consisting of cash equivalents and marketable securities, are
reported at amortized cost, which approximates fair market value. Cash
equivalents are highly liquid investments with original maturities of less than
90 days. Marketable securities are investment grade debt securities with
original maturities of greater than 90 days. At December 31, 2000 and 2001, all
of ATG's marketable securities were held in commercial paper and corporate bonds
and were classified as held-to-maturity. The average maturity of ATG's
marketable securities is approximately 11.4 months and 4.3 months at
December 31, 2000 and 2001, respectively. At December 31, 2000 and 2001, the
difference between the amortized cost and market value of ATG's marketable
securities was approximately $181,000 and $163,000, respectively. At
December 31, 2000 and 2001, ATG's cash, cash equivalents and marketable
securities consisted of the following:

DECEMBER 31,
-------------------
2000 2001
-------- --------
(IN THOUSANDS)

Cash and cash equivalents --
Cash...................................................... $ 4,880 $27,275
Money market accounts..................................... 35,314 38,975
Corporate securities...................................... 13,061 --
------- -------
Total cash and cash equivalents......................... $53,255 $66,250
======= =======
Marketable securities --
Corporate debt securities................................. $90,952 $14,057
------- -------
Total marketable securities............................. $90,952 $14,057
======= =======

(g) Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. ATG provides for depreciation and amortization using the
straight-line method and it charges to operations the amounts estimated to
allocate the cost of the assets over their estimated useful lives.

Property and equipment at December 31, 2000 and 2001, consisted of the
following:

DECEMBER 31,
ESTIMATED -------------------
ASSET CLASSIFICATION USEFUL LIFE 2000 2001
-------------------- ------------------- -------- --------
(IN THOUSANDS)

Computer equipment....................................... 3 years $ 9,786 $13,210
Lesser of useful
life or life of
Leasehold improvements................................... lease 11,990 6,021
Furniture and fixtures................................... 7 years 4,496 4,658
Computer software........................................ 3 years 2,011 4,693
------- -------
28,283 28,582
Less -- Accumulated depreciation and amortization........ 4,791 12,411
------- -------
$23,492 $16,171
======= =======

(1) ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Depreciation expense included in the accompanying statements of operations
was approximately $836,000, $3,768,000 and $8,775,000 for the years ended
December 31, 1999, 2000 and 2001, respectively.

(h) Research and Development Expenses for Software Products

ATG has evaluated the establishment of technological feasibility of its
products in accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED. ATG sells products in a
market that is subject to rapid technological change, new product development
and changing customer needs; accordingly, ATG has concluded that technological
feasibility is not established until the development stage of the product is
nearly complete. ATG defines technological feasibility as the completion of a
working model. The time period during which costs could be capitalized, from the
point of reaching technological feasibility until the time of general product
release, is very short and, consequently, the amounts that could be capitalized
are not material to ATG's financial position or results of operations.
Therefore, ATG has charged all such costs to research and development in the
period incurred.

(i) Income Taxes

ATG accounts for income taxes in accordance with the provisions of SFAS
No. 109, ACCOUNTING FOR INCOME TAXES. This statement requires ATG to recognize a
current tax asset or liability for current taxes payable or refundable and to
record a deferred tax asset or liability for the estimated future tax effects of
temporary differences and carryforwards to the extent that they are realizable.
A deferred tax provision or benefit results from the net change in deferred tax
assets and liabilities during the year. A deferred tax valuation allowance is
required if it is more likely than not that all or a portion of the recorded
deferred tax assets will not be realized (see Note 4).

(j) Stock-Based Compensation

SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
measurement of the fair value of stock options or warrants to be included in the
statement of operations or disclosed in the notes to financial statements. ATG
accounts for stock-based compensation for employees under the Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and follows the disclosure-only alternative under SFAS No. 123 (see Note 5(c)).

(k) Comprehensive Income (Loss)

SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires a full set of general
purpose financial statements to include the reporting of comprehensive income
(loss). The Company's comprehensive income (loss) in 1999 and 2000 does not
differ from its net income (loss) and is comprised of two components in 2001,
net loss and foreign currency translation loss. The Company has disclosed such
amounts in the Consolidated Statement of Stockholders' Equity (Deficit) and
Comprehensive Income (Loss).

(l) Fair Value of Financial Instruments

Financial instruments mainly consist of cash and cash equivalents,
marketable securities, accounts receivable, accounts payable and long-term
obligations. The carrying amounts of these instruments approximate their fair
values.

(1) ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
(m) Concentrations of Credit Risk

SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet risk and credit
risk concentrations. ATG has no significant off-balance-sheet risks such as
foreign exchange contracts, option contracts or other foreign hedging
arrangements. To reduce its concentration of credit risk with respect to
accounts receivable, the Company routinely assesses the financial strength of
its customers. ATG maintains an allowance for potential credit losses but
historically has not experienced any significant losses related to individual
customers or groups of customers in any particular industry or geographic area.
ATG places its cash, cash equivalents and marketable securities in several
accredited financial institutions. ATG has not experienced any material losses
to date.

For the years ended December 31, 1999, 2000 and 2001, no customer accounted
for more than 10% of the Company's total revenues.

As of December 31, 2000, no customer accounted for greater than 10% of
accounts receivable. As of December 31, 2001, one customer accounted for 23% of
accounts receivable.

(n) Long-Lived Assets

The Company assesses the realizability of its long-lived assets in
accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Under SFAS No. 121, the Company is
required to assess the valuation of its long-lived assets, including intangible
assets, based on the estimated cash flows to be generated by such assets.

During the year ended December 31, 2001, the Company wrote off fixed assets
of $9.9 million, unamortized goodwill of $4.0 million and $1.4 million of
impaired purchased software (see Note 11).

(o) Foreign Currency Translation

The financial statements of the Company's foreign subsidiaries are
translated in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. In 1999
and 2000, the functional currency of the Company's foreign subsidiaries is the
U.S. dollar. Accordingly, all assets and liabilities of the foreign subsidiaries
are translated using the exchange rate at the balance sheet date, except for
property and equipment, other assets and stockholders' equity, which are
translated at historical rates. Revenues and expenses are translated at
historical rates. In 2001, the Company determined the functional currency of its
foreign subsidiaries was the local currency. As a result, the Company translates
the assets and liabilities of its foreign subsidiaries at the exchange rates in
effect at year end. Revenues and expenses are translated using average exchange
rates in effect during the year. Gains and losses from foreign currency
translation are credited or charged to accumulated other comprehensive loss
included in stockholders' equity in the accompanying consolidated balance
sheets. During the years ended December 31, 1999, 2000, and 2001, the Company
recorded $0, $0, and $58, respectively, in transactional gains (losses) which
are included in Interest and Other Income, Net in the accompanying statements of
operations.

(1) ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
(p) Recent Accounting Pronouncements

SFAS No. 141, BUSINESS COMBINATIONS, requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method. The
adoption of SFAS No. 141 did not have an impact on the Company's consolidated
financial statements.

Under SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, goodwill and other
intangible assets with indefinite lives will no longer be subject to
amortization over their estimated useful lives. Rather, goodwill is subject to
at least an annual assessment for impairment by applying a fair-value-based
test. Also under SFAS No. 142, intangible assets acquired in conjunction with a
business combination should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirer's intent to do so. Intangible assets with
determinable lives will continue to be amortized over their respective useful
lives under SFAS No. 142. The Company must adopt SFAS No. 142 on January 1,
2002. The Company does not anticipate the adoption of SFAS No. 142 will have a
material impact on its consolidated financial statements.

SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, but retains
SFAS No. 121's fundamental provisions for (a) recognition/ measurement of
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No.144 also supersedes the
accounting/reporting provisions of APB OPINION NO. 30, REPORTING THE RESULTS OF
OPERATIONS--REPORTING THE EFFECTS OF A DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for
segments of a business to be disposed of but retains the requirement to report
discontinued operations separately from continuing disposing operations and
extends that reporting period to a component of an entity that either has been
disposed of or is classified as held for sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years. The Company does not anticipate that the adoption of SFAS No. 144
will have a material impact on its consolidated financial statements.

In November 2001, the Emerging Issues Task Force (EITF) issued Topic
No. D-103 relating to the accounting for reimbursements received for
out-of-pocket expenses. In accordance with Topic No. D-103, reimbursements
received for out-of-pocket expenses incurred should be characterized as revenue
in the statement of operations. The Company has historically accounted for such
reimbursements as a reduction of cost of revenues. The Company will adopt Topic
No. D-103 in financial reporting periods beginning after December 31, 2001 and
comparative consolidated financial statements for prior periods will be
reclassified to comply with the guidance in Topic No. D-103.

(2) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE

SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision-maker, or decision-making group, in making decisions how to allocate
resources and assess performance. The Company's chief operating decision-makers,
as defined under SFAS No. 131, is its executive management team. To date, the
Company has viewed its operations and manages its business

(2) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE (CONTINUED)
as principally one segment with two product offerings: software licenses and
services. The Company evaluates these product offerings based on their
respective gross margins. As a result, the financial information disclosed
herein represents all of the material financial information related to the
Company's principal operating segment.

Revenues from sources outside of the United States were approximately
$2,245,000, $37,569,000 and $47,584,000 in 1999, 2000 and 2001, respectively.
ATG's revenues from international sources were primarily generated from
customers located in Europe and Asia/Pacific. All of the ATG's product sales for
the years ended December 31, 1999, 2000 and 2001, were delivered from its
headquarters located in the United States.

The following table represents the percentage of total revenues by
geographic region from customers for 1999, 2000 and 2000:

YEARS ENDED
DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------

United States............................................... 93% 77% 66%
Europe, Middle East and Africa (excluding UK)............... 2 13 18
United Kingdom (UK)......................................... 4 6 10
Asia Pacific................................................ 1 2 2
Other....................................................... -- 2 4
--- --- ---
100% 100% 100%
=== === ===

(3) LONG-TERM OBLIGATIONS

(a) Credit Facility

Throughout 2001, ATG had a working capital line-of-credit agreement with a
bank, which provided for borrowings of up to the lesser of $12,500,000, or 80%,
of eligible accounts receivable (as defined). The line of credit bore interest
at the bank's prime rate (4.75% at December 31, 2001) and expired in
December 2001. As of December 31, 2001, ATG had commitments totaling
approximately $16,757,000 in the form of outstanding standby letters of credit
(LC's) in favor of ATG's various landlords to secure obligations under ATG's
facility leases. All LC's were fully cash secured as of December 31, 2001.

(b) Non-Recourse Receivables Purchase Agreement with a Bank

In September 2000, ATG entered into a Non-Recourse Receivables Purchase
Agreement with a bank (the Receivables Agreement), whereby ATG could sell up to
$10.0 million of its accounts receivable to the bank. Under the terms of the
Receivables Agreement, ATG could sell certain accounts receivable, subject to
acceptance by the bank, on a non-recourse basis. Upon purchase, the bank assumes
the risk of collection for the acquired accounts receivable except in the event
that ATG violates the terms of the receivables purchase agreement or the
customer asserts a discount, allowance, warranty claim or right of return. The
accounts receivable are sold at a discount to reflect a minimum of 45 days and a
maximum of 135 days at the bank's prime rate plus 1%. This agreement expired in
September 2001. In September 2000, ATG sold $9.6 million of accounts receivable
to the bank under the Receivables Agreement. ATG has determined that, in
accordance with SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES and SFAS No. 140, ACCOUNTING
FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES, the transaction is accounted for as a sale of accounts receivable
and accordingly has reduced accounts

(3) LONG-TERM OBLIGATIONS (CONTINUED)
receivable by the amount of the accounts receivable which have been sold in the
accompanying consolidated balance sheets. As of February 2001, all of the sold
receivables were collected in full and remitted to the bank.

ATG entered into a term note payable with a bank under which ATG could have
borrowed up to $500,000 based upon certain conditions, as defined. Borrowings
bore interest at the bank's prime rate plus 1%. During July 1999, all amounts
were repaid. In connection with the term note payable, ATG issued warrants to
purchase 56,296 shares of Series C convertible preferred stock to the bank. One
warrant provided for the purchase of 46,296 shares at an exercise price of $1.62
per share and the other warrant provided for the purchase of 10,000 shares at an
exercise price of $0.01 per share. These warrants vested immediately. ATG valued
the warrants at $58,000, using the Black-Scholes option pricing model and the
following assumptions: fair market value of the stock of $1.62; risk-free
interest rate of 4.74%; an expected volatility factor of 70%; an expected life
of four years; and an expected dividend yield of zero. The warrants were
recorded as a debt discount. For the year ended December 31, 1999, ATG amortized
$40,000. In July 1999, in connection with ATG's accelerated debt repayment, ATG
amortized the remainder of the debt discount. In connection with ATG's initial
public offering, the warrants were converted into warrants to purchase 342,970
shares of common stock. In July 1999, the warrants to purchase 342,970 shares of
common stock were exercised through a cashless exercise resulting in the net
issuance of 314,476 shares of common stock.

(d) BroadVision Settlement

In connection with a settlement of the patent infringement claim by
BroadVision Inc. (Broadvision), ATG acquired a perpetual, paid-up license for
BroadVision's patented technology. ATG paid $11,000,000 and $2,000,000 during
the years ended December 31, 2000 and 2001. The remaining $2,000,000 will be
paid in fiscal year 2002 in quarterly installments of $500,000. At December 31,
2000, these payments are included in the accompanying consolidated balance sheet
as follows: $2,000,000 in current maturities of long-term obligations and
$2,000,000 in long-term obligations. At December 31, 2001, these payments are
included in the accompanying consolidated balance sheet as follows: $2,000,000
in current maturities of long-term obligations, with no long-term obligations.
ATG expensed $8,000,000, $2,333,000 and $2,333,000 of the settlement as cost of
service revenues in the years ended December 31, 1999, 2000 and 2001,
respectively. The remainder will be amortized in fiscal year 2002.

(4) INCOME TAXES

Income (loss) before provision for income taxes consists of the following
(in thousands):

YEARS ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
-------- -------- ---------

Domestic.................................................... $(13,132) $16,651 $(128,885)
Foreign..................................................... -- 1,214 (3,269)
-------- ------- ---------
Total................................................... $(13,132) $17,865 $(132,154)
======== ======= =========

The provision for income taxes shown in the accompanying consolidated
statements of operations is composed of the following (in thousands):

YEARS ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
--------- -------- --------

Federal
Current................................................... $ -- $8,780 $ --
Deferred.................................................. -- (7,385) 19,140
State
Current................................................... -- 1,789 53
Deferred.................................................. -- (1,533) 3,200
Foreign
Current................................................... -- 1,727 2,457
Deferred.................................................. -- -- (999)
--------- ------ -------
$ -- $3,378 $23,851
========= ====== =======

(4) INCOME TAXES (CONTINUED)

The provision for income taxes differs from the federal statutory rate due
to the following:

YEARS ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------

Federal tax at statutory rate............................... 35.0% 35.0% (35.0)%
State taxes, net of federal benefit......................... 6.0 6.5 (3.1)
Meals and entertainment..................................... -- 6.1 1.0
Deferred compensation....................................... -- 4.9 --
Non-deductible restructuring costs.......................... -- -- 2.0
Other....................................................... -- 1.8 --
------ ------ ------
Provision before valuation allowance........................ 41.0 54.3 (35.1)
------ ------ ------
Valuation allowance......................................... (41.0) (35.4) 53.1
------ ------ ------
--% 18.9% 18.0 %
====== ====== ======

The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets are as follows (in thousands):

DECEMBER 31,
-------------------
2000 2001
-------- --------

Deferred tax assets......................................... $22,596 $ --
Deferred tax liabilities.................................... (1,256) --
------- -------
$21,340 $ --
======= =======

The approximate tax effect of each type of temporary difference and
carryforward is as follows (in thousands):

DECEMBER 31,
-------------------
2000 2001
-------- --------

Cumulative temporary differences............................ $ 4,350 $ 21,811
US Income tax credits....................................... 642 1,037
Net operating losses........................................ 17,347 47,357
Acquisition related......................................... (999) --
Valuation-allowance......................................... -- (70,205)
------- --------
$21,340 $ --
======= ========

As of December 31, 2001, ATG had net operating loss carryforwards of
approximately $124.1 million for federal income tax purposes and approximately
$120.2 million for state income tax purposes. Approximately $35.0 million of the
federal and state income tax net operating loss carryforwards relate to the
exercise of incentive and nonqualified stock options which are treated as
compensation deductions for federal and state income tax purposes. ATG also has
available federal tax credit carryforwards of approximately $1.0 million. If not
utilized, these carryforwards will expire at various dates beginning 2011
through 2021. If substantial changes in ATG's ownership should occur, as defined
by Section 382 of the Internal Revenue Code (the Code), there could be annual
limitations on the amount of carryforwards that can be realized in future
periods. ATG has completed several refinancings since its inception and has
incurred ownership changes, as defined under the Code, which

(4) INCOME TAXES (CONTINUED)
could have an impact on the Company's ability to utilize these tax credit and
operating loss carryforwards.

As of December 31, 2001, the Company has recorded a full valuation-allowance
against its deferred tax assets due to the uncertainty surrounding the
realizability of these assets. In order to record the full valuation against the
previously recognized tax assets, the Company recorded a realized charge of
$23.9 million in 2001.

(5) STOCKHOLDERS' EQUITY

(A) PREFERRED STOCK

As of December 31, 1998, ATG's Board of Directors had authorized 10,000,000
shares of preferred stock and had designated 1,300,000, 851,064, 2,000,000 and
2,343,750 shares as Series A convertible preferred stock (Series A Preferred
Stock), Series B redeemable convertible preferred stock (Series B Preferred
Stock), Series C convertible preferred stock (Series C Preferred Stock) and
Series D redeemable convertible preferred stock (Series D Preferred Stock),
respectively. On July 26, 1999, in conjunction with ATG's initial public
offering, all outstanding shares of preferred stock were converted into shares
of common stock. Additionally, all previously authorized shares were cancelled.

In conjunction with the issuance of the Series B Preferred Stock in
December 1996, ATG issued to a holder of Series B Preferred Stock a
performance-based warrant to purchase up to 425,532 shares of Series B Preferred
Stock at $7.05 per share. The performance criteria was based upon sales
generated by ATG from the affiliates of the Series B Stockholder. ATG generated
negligible revenues from the affiliates of the Series B Stockholder; therefore,
the warrant was not measured or recorded. As a condition for obtaining the
Series B Stockholder's approval of the terms of the Series D Preferred Stock
financing in 1999, the warrant was canceled and ATG granted to the Series B
Preferred Stockholder a new warrant to purchase 425,532 shares of ATG's
Series B Preferred Stock at a purchase price of $1.385 per share, which was
immediately exercisable and fully vested. The warrant was to expire on the
earlier of: (1) the closing of a public offering of ATG's common stock, as
defined, at a price of at least $10 per share resulting in gross proceeds to ATG
of at least $10,000,000, (2) the closing of a liquidation, merger, sale of all
or substantially all assets of ATG or other similar event, as defined, or
(3) August 18, 2003. ATG has valued this warrant at $1,053,000, using the
Black-Scholes option pricing model and the following assumptions: a fair market
value of $3.20 per share, a risk-free interest rate of 5.0%, an expected
volatility of 70%, an expected life of five years, and an expected dividend
yield of zero. ATG has recorded the value of the warrant in the accompanying
statement of stockholders' equity (deficit) and as a component of dividends on
preferred stock in computing net loss per share available to common stockholders
for the year ended December 31, 1999.

In addition, in connection with the issuance of the Series D Preferred
Stock, ATG issued to the holders of Series D Preferred Stock, warrants to
purchase up to 4,292,650 shares of ATG's common stock at $0.11 per share,
adjusted for certain dilutive events, as defined. The warrants were to vest 5%
per quarter beginning on September 30, 1998 and expire August 18, 2003. ATG
valued these warrants using the Black-Scholes option pricing model and the
following assumptions: a fair market value of $3.20 per share, a risk free
interest rateof 4.74%, an expected volatility of 70%, an expected life of five
years and an expected dividend yield of zero. ATG allocated the consideration
received from the sale of the Series D Preferred Stock of $7,500,000 between the
Series D Preferred Stock and warrants on the basis of the fair value of the
individual component at the date of issuance and determined that the warrants
were valued at $2,775,000. These warrants were recorded as a discount to the
Series D Preferred Stock and the resulting discount was amortized over the
redemption period in computing net

(5) STOCKHOLDERS' EQUITY (CONTINUED)
loss per share. For the years ended December 31, 1999, ATG amortized $2,491,000.
The amortization for the year ended December 31, 1999 included the accelerated
amortization in connection with the conversion of the Series D Preferred Stock
in connection with the initial public offering.

In conjunction with ATG's initial public offering, the warrants to purchase
Series B Preferred Stock and common stock were canceled and the number of shares
of common stock issuable upon conversion of the Series B and D Preferred Stock
were increased to reflect the shares that would have been received upon exercise
of the warrants based upon the initial public offering price.

(B) STOCK SPLITS

On February 28, 2000, ATG's Board of Directors approved a 2-for-1 stock
split of ATG's common stock. The split was effective on March 10, 2000. In
addition, on May 10, 1999, ATG's Board of Directors approved a 3-for-2 stock
split of ATG's common stock. The stock split was effective on June 18, 1999. All
share and per share amounts of common stock for all periods have been
retroactively adjusted to reflect the stock splits.

1996 STOCK OPTION PLAN

In April 1996, the 1996 Stock Option Plan (the 1996 Plan) was approved by
ATG's Board of Directors and stockholders. The purpose of the 1996 Plan is to
reward employees, officers and directors, and consultants and advisors to ATG
who are expected to contribute to the growth and success of ATG. The 1996 Plan
provides for the award of options to purchase shares of ATG's common stock.

Stock options granted under the 1996 Plan may be either incentive stock
options or nonqualified stock options.

The 1996 Plan is administered by the Board of Directors, which has the
authority to designate participants, determine the number and type of options to
be granted, the time at which options are exercisable, the method of payment and
any other terms or conditions of the options. Options generally vest quarterly
over a two- to four-year period and expire 10 years from the date of grant.

While the Board determines the prices at which options may be exercisedunder
the 1996 Plan, the exercise price of an incentive stock option shall be at least
100% (110% for incentive stock options granted to a 10% stockholder) of the fair
market value of ATG's common stock on the date of grant. On May 14, 2001, the
1996 Plan was amended to increase the total shares of common stock that have
been reserved for options to be granted to 25,600,000. As of December 31, 2001,
there are 7,154,000 shares available for future grant under the 1996 Plan.

Additionally, in May 1999, ATG granted 150,000 options outside ATG's stock
option plans to an executive of ATG. As of December 31, 2001, these options have
not been exercised.

1999 OUTSIDE DIRECTOR STOCK OPTION PLAN

The 1999 Outside Director Stock Option Plan (Director Plan) was adopted by
ATG's Board of Directors and approved by stockholders in May 1999. Under the
terms of the Director Plan, non-employee directors of ATG receive nonqualified
options to purchase shares of common stock. A total of 300,000 shares of common
stock have been reserved under the Director Plan.

Under the terms of the Director Plan, each currently active non-employee
director received an option to purchase 10,000 shares of common stock on the
effective date of the Company's initial public

(5) STOCKHOLDERS' EQUITY (CONTINUED)
offering at the public offering price. Individuals who become directors after
the initial public offering and are not employees of ATG will receive an option
to purchase 25,000 shares of the Company's common stock on the date of initial
election to ATG's Board of Directors at an exercise price equal to the then
current fair market value. In addition, each non-employee director will receive
an option to purchase 10,000 shares of common stock on the date of each annual
meeting of stockholders commencing in the year 2000 at an exercise price per
share equal to the closing price of ATG's common stock on the date of grant. All
options granted under the Director Plan are fully vested upon grant. As of
December 31, 2001, there are 90,000 shares available for future grant under the
Director Plan.

1999 EMPLOYEE STOCK PURCHASE PLAN

The 1999 Employee Stock Purchase Plan (the Stock Purchase Plan) was adopted
by ATG's Board of Directors and approved by stockholders in May 1999. The Stock
Purchase Plan authorizes the issuance of up to a total of 1,000,000 shares of
ATG's common stock to participating employees. All ATG's employees, including
directors who are employees, are eligible to participate in the Stock Purchase
Plan. Employees who would immediately after the grant own 5% or more of the
total combined voting power or value of the Company's stock are not eligible to
participate. During each designated semiannual offering period, each eligible
employee may deduct between 1% to 10% of base pay to purchase common stock of
ATG. The purchase price will be 85% of the closing market price of ATG's common
stock on either: (1) the first business day of the offering period or (2) the
last business day of the offering period, whichever is lower.

ATG accounts for the Stock Purchase Plan in accordance with APB No. 25 and,
accordingly, no compensation cost has been recognized under the Stock Purchase
Plan. ATG has elected the "disclosure only" alternative under SFAS No. 123.

During the years ended 2000 and 2001, 179,099 and 131,708 shares,
respectively, were issued under the 1999 Employee Stock Purchase Plan. As of
December 31, 2001, there were 689,193 shares remaining unissued in the plan.

(5) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes ATG's option activity under the Company's
1996 Plan and Director Plan:

WEIGHTED
AVERAGE
NUMBER EXERCISE EXERCISE
OF SHARES PRICE PRICE
--------- ----------- --------
(IN THOUSANDS, EXCEPT PER-SHARE
INFORMATION)

Outstanding, December 31, 1998.............................. 5,878 $ .07-.25 $ .22
Granted................................................... 4,960 1.00-52.50 14.52
Exercised................................................. (1,957) .07-5.75 .40
Canceled.................................................. (543) .07-5.75 1.20
------ ----------- ------
Outstanding, December 31, 1999.............................. 8,338 .07-52.50 8.65
Granted................................................... 4,917 06-120.00 66.93
Exercised................................................. (2,164) .07-81.56 2.23
Canceled.................................................. (549) .06-120.00 22.25
------ ----------- ------
Outstanding, December 31, 2000.............................. 10,542 .06-120.00 36.42
Granted................................................... 8,532 .07-40.25 8.81
Exercised................................................. (937) .06-75.56 12.36
Canceled.................................................. (5,099) .06-120.00 35.47
------ ----------- ------
Outstanding, December 31, 2001.............................. 13,038 $.06-120.00 $21.25
====== =========== ======
Exercisable, December 31, 2001.............................. 4,370 $.06-120.00 $23.76
====== =========== ======
Exercisable, December 31, 2000.............................. 2,297 $.06-120.00 $13.81
====== =========== ======
Exercisable, December 31, 1999.............................. 2,200 $ .07-19.03 $ 1.16
====== =========== ======

The following table summarizes information relating to currently outstanding
and exercisable options as of December 31, 2001:

OUTSTANDING
----------------------------------------
WEIGHTED
AVERAGE EXERCISABLE
REMAINING ---------------------
CONTRACTUAL WEIGHTED WEIGHTED
LIFE AVERAGE NUMBER AVERAGE
NUMBER OF OUTSTANDING EXERCISE OF EXERCISE
RANGE OF EXERCISE PRICES SHARES (YEARS) PRICE SHARES PRICE
------------------------ --------- --------------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER-SHARE INFORMATION)

$.06-$.08 23 5.5 $ .07 18 $ .07
.25 933 6.4 .25 752 .25
.70-1.02 776 8.8 .94 190 1.00
1.31-1.91 864 9.0 1.37 183 1.37
2.00-2.61 2,182 9.6 2.13 17 2.00
3.01-4.24 578 8.5 3.78 164 3.99
4.78-6.19 2,253 8.1 4.93 889 4.98
8.27-12.00 820 9.3 9.52 636 9.20
13.41-20.00 715 8.5 17.36 141 15.81
22.81-32.44 368 9.0 27.33 39 29.45
34.25-51.50 1,118 8.5 41.36 321 44.39
51.69-76.00 1,268 7.5 58.69 608 58.32
78.00-101.94 911 8.3 85.79 331 85.38
120.00 229 8.0 120.00 81 120.00
------ --- ------ ----- ------
13,038 8.4 $21.25 4,370 $23.76
====== === ====== ===== ======

(5) STOCKHOLDERS' EQUITY (CONTINUED)
Since the fourth quarter of 1998, ATG has recorded deferred compensation of
approximately $4.9 million, which represents the aggregate difference between
the exercise price and the fair market value of the common stock, as determined
for accounting purposes. The deferred compensation is being recognized as an
expense over the vesting period of the underlying stock options. ATG recorded
compensation expense of, $1,127,000, $1,013,000 and $870,000 for the years ended
December 31, 1999, 2000 and 2001, respectively, related to these options.

ATG has computed the pro forma disclosures required under SFAS No. 123 for
options and shares granted under the Company's Stock Plans during the years
ended December 31, 1999, 2000 and 2001. The fair value of options granted during
the years ended December 31, 1999, 2000 and 2001 was approximately $53,234,000
or $10.84 per share, $256,901,000 or $52.64 per share and $62,197,000 or $7.40
per share, respectively. These amounts will be amortized over the underlying
option period. The amounts were computed using the Black-Scholes option pricing
model prescribed by SFAS No. 123. The assumptions used and weighted average
calculations are as follows:

YEARS ENDED DECEMBER 31,
---------------------------------------
1999 2000 2001
----------- ----------- -----------

Risk-free interest rate................................. 5.29-6.06% 5.92% 4.43%
Expected dividend yield................................. -- -- --
Expected lives.......................................... 4 years 4 years 4 years
Expected volatility..................................... 95% 115% 135%
Weighted average remaining contractual life of options
outstanding........................................... 8.90 years 8.80 years 8.4 years

Had compensation expense for ATG's Stock Plans been determined consistent
with SFAS No. 123, the pro forma net loss available for common stockholders and
pro forma net loss per share would have been as follows:

YEARS ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
-------- -------- ---------
(IN THOUSANDS, EXCEPT PER-SHARE
INFORMATION)

Net income (loss) available for common stockholders --
As reported............................................... $(17,527) $ 14,487 $(156,005)
Pro forma................................................. $(20,225) $(13,786) $(204,703)
Basic net income (loss) per share --
As reported............................................... $ (0.45) $ 0.22 $ (2.27)
Pro forma................................................. $ (0.52) $ (0.21) $ (2.98)
Diluted net income (loss) per share --
As reported............................................... $ (0.45) $ 0.20 $ (2.27)
Pro forma................................................. $ (0.52) $ (0.21) $ (2.98)

ADOPTION OF SHAREHOLDERS' RIGHTS PLAN

On September 26, 2001, our Board of Directors adopted a Shareholder Rights
Plan pursuant to which preferred stock purchase rights were distributed to
shareholders as a dividend at the rate of one Right for each share of common
stock held of record as of the close of business on October 9, 2001. The Plan
was adopted to enable the Board of Directors to protect the Company against any
takeover attempt that the Board considers not to be in the best interests of
shareholders.

(5) STOCKHOLDERS' EQUITY (CONTINUED)
When exercisable, each Right will entitle shareholders to buy one
one-thousandth of a share of a newly created Series A Junior Participating
Preferred Stock at an exercise price of $15 per Right. Subject to certain
exceptions, the Rights will be exercisable after a person or group (except for
certain excluded persons) acquires beneficial ownership of 15% or more of our
outstanding common stock or undertakes a tender or exchange offer which, if
consummated, would result in that person or group beneficially owning 15% or
more of our outstanding common stock. The Rights will be redeemable by the Board
at any time before a person or group acquires 15% or more of our outstanding
common stock and under certain other circumstances at a redemption price of
$.001 per Right.

(6) ACQUISITIONS

On June 1, 2000, ATG completed the acquisition of Petronio Technology Group,
a Boston-based provider of educational training and consulting services. ATG
acquired Petronio Technology Group for $1,200,000, consisting of an initial
payment of $600,000 at the closing and two annual contingent payments of
$300,000 each. The acquisition has been accounted for under the purchase method
of accounting and the results of operations for Petronio Technology Group have
been included in ATG's results from the acquisition date. ATG recorded $600,000
in goodwill that was being amortized over two years and the Company is
recognizing the contingent payments as compensation expense ratably over the
two-year vesting period. For the year ended December 31, 2000, ATG recorded
amortization expense of $188,000 and compensation expense of $188,000. For the
year ended December 31, 2001, ATG recorded amortization expense of $241,000 and
compensation expense of $300,000. Additionally, due to the Company's
restructuring of its business operations, the Company determined the goodwill
related to the asset was permanently impaired. As a result, the Company wrote
off $171,000 of the remaining unamortized goodwill in the fourth quarter of
2001. This amount is included in the Company's restructuring charge (see
Note 11).

On July 17, 2000, ATG completed the acquisition of The Toronto Technology
Group, Inc., a privately held 30-person consulting and educational services
company based in Toronto, Canada, for approximately $12.0 million in cash,
options and shares of common stock. The acquisition has been accounted for under
the purchase method of accounting. Upon the closing of the transaction, ATG paid
$5.2 million in cash, issued 19,634 employee stock options and also issued
56,237 exchangeable shares of ATG's subsidiary Art Technology Group
(Canada), Inc. The exchangeable shares will become exchangeable for 56,237
shares of ATG's common stock, subject to a three-year vesting schedule. As of
December 31 2001, 18,745 shares were exchanged for ATG Inc. common shares. The
Company accrued approximately $2.1 million in compensation expense ratably from
July 18, 2000 to July 17, 2001, related to these shares that were exchanged.
Additionally, the company settled 11,762 exchangeable shares with a certain
employee. Upon settlement, ATG recorded $1.3 million as a component of
restructuring expense (see Note 11). This expense included both the cash paid to
settle the award and unamortized deferred compensation at the time of
settlement. Additionally, 25,712 shares were forfeited when the remainder of the
employees left the company. Also, as part of the 2001 restructuring charge, ATG
incurred charges relating to headcount reductions, excess office space, and the
write-off of the remaining goodwill of $3.8 million all relating to the Toronto
Technology Group Inc. acquisitions. This charge was included as part of the
restructuring (see Note 11).

(7) COMMITMENTS AND CONTINGENCIES

(A) LEASES

In August 1999, ATG entered into a new facility lease for its corporate
headquarters that expires in August 2006. Upon occupancy of the new facility,
ATG has issued the lessor a letter of credit in the

(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
amount of $1,500,000 as a security deposit. Additionally, ATG has offices,
primarily for sales and support personnel, in ten domestic locations as well as
ten foreign countries.

The approximate future minimum payments of ATG's facility leases and certain
operating equipment leases as of December 31, 2001, are as follows:

YEARS ENDING DECEMBER 31, OPERATING LEASES
------------------------- ----------------
(IN THOUSANDS)

2002........................................................ $ 16,749
2003........................................................ 16,512
2004........................................................ 15,143
2005........................................................ 15,844
2006........................................................ 13,785
Thereafter.................................................. 26,771
--------
Total future minimum lease payments..................... $104,804
========

Of the $104.8 million in future minimum lease payments, $65.1 million was
included in the Company's 2001 restructuring charge. The $65.1 million was
reduced to a $44.7 million restructuring charge after taking into consideration
estimated sublease income and vacancy periods (see Note 11).

Rent expense included in the accompanying statements of operations was
approximately $1,752,000, $6,029,000 and $15,076,000 for the years ended
December 31, 1999, 2000 and 2001 respectively.

(8) EMPLOYEE BENEFIT PLAN

Effective January 1, 1997, ATG adopted the Art Technology Group 401(k) Plan
(the 401(k) Plan). All employees, as defined, are eligible to participate in the
401(k) Plan. The 401(k) Plan allows eligible employees to make salary-deferred
contributions of up to 15% of their annual compensation, as defined, subject to
certain Internal Revenue Service limitations. ATG may contribute to the 401(k)
Plan at its discretion. No discretionary employer contributions were made to the
Plan for the year ended December 31, 1999. For the years ended December 31, 2000
and 2001, ATG made a discretionary contributions to the 401(k) Plan of
approximately $888,000 and $1,008,000, respectively.

(9) ACCRUED EXPENSES

Accrued expenses at December 31, 2000 and 2001 consist of the following:

DECEMBER 31,
-------------------
2000 2001
-------- --------
(IN THOUSANDS)

Payroll and related costs................................... $18,006 $ 8,506
Accrued accounts payable.................................... 1,376 1,105
Other....................................................... 10,020 15,107
------- -------
$29,402 $24,718
======= =======

(10) VALUATION AND QUALIFYING ACCOUNTS

The following is a rollforward of ATG's allowance for doubtful accounts (in
thousands):

ADDITIONS/
CHARGES
BEGINING OF TO DEDUCTIONS BALANCE AT END
PERIOD EXPENSE /WRITEOFFS OF PERIOD
----------- ---------- ---------- --------------

Year Ended December 31, 1999.................... $ 250 $ 210 $ -- $ 460
====== ====== ======= ======
Year Ended December 31, 2000.................... $ 460 $2,976 $ (781) $2,655
====== ====== ======= ======
Year Ended December 31, 2001.................... $2,655 $4,900 $(4,016) $3,539
====== ====== ======= ======

(11) RESTRUCTURING

ATG undertook plans to restructure its operations during 2001, as a result
of a global slowdown in information technology spending. Actions taken by ATG
include: consolidation of excess facilities, a worldwide workforce reduction,
the write-off of certain unrealizable assets and settling certain obligations
that have no future benefit. In the second quarter ATG recorded a restructuring
charge of $44.2 million, and in the fourth quarter of 2001, ATG recorded a
restructuring charge of $32.7 million. Total restructuring charges for the year
totaled $76.9 million.

The significant components of the restructuring charge (in thousands):

RESTRUCTURING CHARGES
-------------------------------------------- ACCRUED
QUARTER RESTRUCTURING
ENDED QUARTER ENDED AS OF
JUNE 30, DECEMBER 31, YEAR ENDED PAYMENTS OR DECEMBER 31,
2001 2001 DECEMBER 31, 2001 WRITE OFFS 2001
-------- ------------- ----------------- ----------- -------------

Facilities-related costs...... $38,100 $22,818 $60,918 $16,208 $44,710
Employee severance, benefits
and related costs........... 4,757 3,181 7,938 6,748 1,190
Asset impairments............. 212 5,358 5,570 5,570 --
Exchangeable share
settlement.................. -- 1,263 1,263 1,263
Marketing costs............... 851 -- 851 851 --
Legal and accounting costs.... 315 90 405 232 173
------- ------- ------- ------- -------
Total......................... $44,235 $32,710 $76,945 $30,872 $46,073
======= ======= ======= ======= =======

The facilities-related cost component consisted of idle lease space and
termination payments for offices worldwide, which are no longer required as a
result of the reduction in personnel. In determining the facilities-related
costs, ATG has estimated the vacancy period and sublease income. A component of
the fourth quarter facility-related cost was a change in estimate of the second
quarter facility-related restructuring charge. The net change in estimate was an
additional charge of $1.5 million in the fourth quarter. Of the $1.5 million
charge, a credit of $8.2 million was realized due to the buy out of a lease in
the second quarter charge. The Company agreed to pay $9.3 million ratably over
4.5 years in relation to the buyout. This credit was offset by an increase of
approximately $9.7 million due to updated assumptions, as a result of a market
analysis, in decreased sublease rates and increased vacancy periods for two
leases provided for in the second quarter. A component of the $60.9 million
facility-related restructuring costs, relates to the write-off of the abandoned
net book value of leasehold improvements and fixed assets of $7.7 million and
$2.2 million, respectively. These fixed assets were directly related to the
restructured excess office facilities.

(11) RESTRUCTURING (CONTINUED)
The employee severance cost component of the restructuring charge was
related to reductions in personnel. As part of the restructuring, the employment
of 530 employees, or 46% of our workforce, was terminated. Approximately 47% of
these employees were from sales and marketing, 22% from services, 19% from
general and administrative and 11% from research and development.

The asset impairment-related costs included the write-off the remaining
unamortized goodwill totaling approximately $4.0 million was related to the two
professional service acquisitions completed in 2000. In addition the Company
determined that approximately $1.4 million of purchased software was deemed
impaired due to our revised product development strategy.

ATG settled 11,762 exchangeable shares with a certain employee. Upon
settlement, ATG recorded $1.3 million as a charge to restructuring.

At December 31, 2001, ATG had an accrued restructuring liability of
$46.1 million, of which $32.7 million was long-term. The majority of the
remaining liability is comprised of facility-related costs.

(12) LITIGATION

On October 31, 2000, Aron Rosenberg, one of the Company's stockholders,
brought a claim on our behalf in the U.S. District Court for the District of
Delaware. Mr. Rosenberg alleges that the Tudor and Raptor entities violated
Section 16(b) of the Securities Exchange Act of 1934 in connection with their
sale of our common stock after our initial public offering on July 20, 1999.
Those entities acquired the Company's common stock in connection with our
Series D Preferred Stock that they acquired more than six months before the
initial public offering. Mr. Rosenberg claims that those entities should be
deemed to have purchased our common stock when our stockholders approved an
amendment to the Company's Certificate of Incorporation related to preferred
stock of the Company on June 18, 1999. He also claims that those entities
obtained profits of more than $70 million in connection with sales of the
Company's common stock within six months after June 18, 1999, and that those
profits should be paid to the Company. In January 2002, the parties entered into
a settlement agreement subject to the final approval of the court. The court has
entered an order approving the form of settlement. If the settlement is
approved, Tudor will pay $1,450,000 to the Company, from which the Company will
be required to pay to plaintiff's attorneys an amount not to exceed $400,000. In
return, the Company will release Tudor from any claims under Section 16 of the
Exchange Act arising from the facts and circumstances alleged in the complaint.

The Company, and certain officers have been named defendants in seven
purported class action suits currently pending in the United States District
Court for the District of Massachusetts. Each of these cases alleges that the
company, and certain officers have violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and SEC Rule 10b-5, which generally may subject
issuers of securities and persons controlling those issuers to civil liabilities
for fraudulent actions or defects in the public disclosure required by
securities laws. Four of the cases were filed on various dates in October 2001
in the U.S. District Court for the District of Massachusetts. Three of the cases
were initially filed in the Central District of California (the "California
actions") on various dates in August and September 2001. The California actions
were consolidated and transferred to the District of Massachusetts on or about
November 27, 2001. On December 13, 2001, the Court issued an Order of
Consolidation in which it consolidated all actions filed against us and
appointed certain individuals as Lead Plaintiffs in the consolidated action. It
also appointed two law firms as Co-Lead Counsel, and a third law firm as Liaison
Counsel. Counsel for the plaintiffs will file a Consolidated Amended Complaint
applicable to all of the consolidated actions.

(12) LITIGATION (CONTINUED)
While management believes the claims against the Company are without merit,
and intends to defend the action vigorously, the litigation is in the
preliminary stage.

The Company is also subject to various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Company's business, financial
condition or results of operations.

(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table presents a condensed summary of quarterly results of
operations for the years ended December 31, 2000 and 2001:

YEAR ENDED DECEMBER 31, 2000
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------

Total revenues.......................................... $21,572 $32,629 $46,310 $62,831
Gross profit............................................ 15,872 24,867 35,318 49,120
Net income (loss)....................................... (607) 2,869 5,009 7,216
Net income (loss) per share
Basic................................................. (0.01) 0.04 0.07 0.11
Diluted............................................... (0.01) 0.04 0.07 0.10

YEAR ENDED DECEMBER 31, 2001
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------

Total revenues........................................ $ 42,846 $ 35,068 $30,039 $ 30,916
Gross profit.......................................... 26,291 21,956 18,832 21,282
Net loss.............................................. (12,912) (41,880) (9,029) (92,184)
Net loss per share
Basic............................................... (0.19) (0.61) (0.13) (1.34)
Diluted............................................. (0.19) (0.61) (0.13) (1.34)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required under this Item is incorporated herein by reference
to our definitive proxy statement pursuant to Regulation 14A, to be filed with
the SEC not later than April 30, 2002 under the headings "Election of Class III
Directors," "Background Information About Directors Continuing in Office" and
"Information About Executive Officers."

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTS

The information required under this Item is incorporated herein by reference
to our definitive proxy statement pursuant to Regulation 14A, to be filed with
the SEC not later than April 30, 2002 under the heading "Information About Stock
Ownership and Performance."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information, if any, required under this Item is incorporated herein by
reference to our definitive proxy statement pursuant to Regulation 14A, to be
filed with the SEC not later than April 30, 2002 under the heading "Related
Party Transactions."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

The following are included in Item 8:

- Report of Independent Public Accountants

- Consolidated Balance Sheets as of December 31, 2000 and 2001

- Consolidated Statements of Operations for the years ended December 31,
1999, 2000 and 2001

- Consolidated Statements of Stockholders' Equity (Deficit) and
Comprehensive Income (Loss) for the years ended December 31, 1999, 2000
and 2001

- Consolidated Statements of Cash Flows for the years ended December 31,
1999, 2000 and 2001

- Notes to Consolidated Financial Statements

(a) (2) Financial Statement Schedule

None

(a) (3) Exhibits

The following exhibits are included in Item 14(c):

EXHIBIT NUMBER DESCRIPTION
-------------- -----------

3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant, as amended.

3.2(2) Amended and Restated By-Laws of the Registrant.

4.1(3) Rights Agreement between Registrant and Equiserve Trust
Company, N.A., as rights Agent.

10.1(4) 1996 Stock Option Plan of the Registrant, as amended.

10.2(4) 1999 Outside Director Stock Option Plan of the Registrant.

10.3(4) 1999 Employee Stock Purchase Plan of the Registrant.

10.4(4) Lease between the Registrant and DVPT Limited Partnership,
dated March 11, 1999.

10.5(4) Loan and Security Agreement between the Registrant and
Silicon Valley Bank, dated November 26, 1997, as amended on
March 31, 1998 and July 2, 1998.

10.6(4) Intellectual Property Security Agreement between the
Registrant and Silicon Valley Bank, dated November 26, 1997.

10.7(4) Registration Rights Agreement between the Registrant and
certain of its stockholders, dated August 18, 1998.

10.8(4) Non-Compete Rights Agreement between the Registrant and Jeet
Singh, dated August 18, 1998.

10.9(4) Non-Compete Agreement between the Registrant and Joseph
Chung, dated August 18, 1998.

10.10(4) Fourth Loan Modification Agreement related to the Loan and
Security Agreement dated November 26, 1997, between the
Registrant and Silicon Valley Bank, dated May 12, 1999.

10.11(5) Registration Rights Agreement between the Registrant and
certain of its stockholders, dated July 17, 2000.

10.12(5) Loan and Security Agreement between the Registrant and
Silicon Valley Bank, dated December 29, 2000.

10.13(5) Non-Recourse Receivables Purchase Agreement between the
Registrant and Silicon Valley Bank, dated September 27,
2000.

10.14 Promissory Note issued by Edward Terino to the Registrant
dated November 21, 2001.

10.15 Termination of Lease Agreement between Amgen Cambridge Real
Estate Holdings, Inc., and the Registrant dated January 2,
2002.

10.15.1 Letter of Credit Agreement between Silicon Valley Bank and
the Registrant noting Amgen Cambridge Real Estate Holdings
as beneficiary, dated December 21, 2001.

10.16 Nonstatutory Option Agreement between Paul Shorthose and the
Registrant dated October 23, 2001.

10.17 Agreement and Release with Ann C. Brady and the Registrant
dated July 1, 2001.

21.(5) Subsidiaries of the Registrant.

23.1 Consent of Arthur Andersen LLP.

99.1 Letter to Securities and Exchange Commission from Registrant
pursuant to Temporary Note 3T, dated March 25, 2002.

------------------------

(1) Incorporated herein by reference to the Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 2001.

(2) Incorporated herein by reference to the Exhibits to the Registrant's
Registration Statement on Form S-3 (File No. 333-64698).

(3) Incorporated herein by reference to the Exhibits to the Registrant's Current
Report on Form 8-K filed on October 2, 2001.

(4) Incorporated herein by reference to the Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-78333).

(5) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000.

(b) REPORTS ON FORM 8-K

On October 2, 2001, the Registrant filed a Current Report on Form 8-K,
reporting the adoption of a shareholder rights plan by its board of
directors.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 25, 2002.

ART TECHNOLOGY GROUP, INC.
(Registrant)

By: /s/ PAUL G. SHORTHOSE
-----------------------------------------
Paul G. Shorthose
CHIEF EXECUTIVE OFFICER
AND PRESIDENT

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities as of March 25, 2002.

NAME TITLE
---- -----

/s/ PAUL G. SHORTHOSE Chief Executive Officer and President
------------------------------------------- (PRINCIPAL EXECUTIVE OFFICER)
Paul G. Shorthose

/s/ EDWARD TERINO Senior Vice President and Chief Financial
------------------------------------------- Officer
Edward Terino (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)

/s/ PHYLLIS S. SWERSKY Director
-------------------------------------------
Phyllis S. Swersky

/s/ SCOTT A. JONES Director
-------------------------------------------
Scott A. Jones

/s/ THOMAS N. MATLACK Director
-------------------------------------------
Thomas N. Matlack

/s/ ILENE H. LANG Director
-------------------------------------------
Ilene H. Lang

/s/ JOSEPH T. CHUNG Director
-------------------------------------------
Joseph T. Chung

/s/ JEET SINGH Director
-------------------------------------------
Jeet Singh